Accounting and Finance Master Thesis no 2001:10

Goodwill – A Controversial Accounting Issue in “the New Economy”.

Different angles of reflection on a current topic in the Swedish IT sector.

Maria Carlberg Leimalm



Graduate Business School of Economics and Commercial School Law Göteborg University ISSN 1403-851X Printed by Elanders Novum AB


The New Economy is a new arena in business life where IT (Information companies act. The IT sector in Sweden grew immensely Technology) during the end of the 1990s. That growth was possible through numerous acquisitions. valuations of the new prosperous enterprises in this young The market’s sector were extremely high. Through a row of highly priced acquisitions, huge goodwill items emerged in most IT companies. Profitability was not a core issue and the future seemed most actors. Share prices fell dramatically during 2000 and bright to IT companies had to write down goodwill in a drastic way in the annual reports. In this thesis different aspects of accounting for goodwill in the annual reports the year 2000 for 29 Swedish IT and Internet companies are covering presented. on two companies, HiQ and TietoEnator, provides a deeper insight A close-up in study. Different concepts of goodwill are looked into. Accounting rules our and regulations dealing with goodwill in specific and with intangibles in general are presented both from a national and an international outlook.

Key words: The New Economy, The Swedish IT sector, Acquisitions, Goodwill, International Accounting Regulations.

......... 21 3............................................................................................................................. 52 5.........................2 P OSITIVISTIC AND HERMENEUTIC PERSPECTIVE ........................1 R ESEARCH APPROACH ....................................................................................... 42 4.......... 41 4......................................3 I NTANGIBLE ASSETS ................................... 65 5. 51 5.....................1 B RIEF HISTORY OF THE SECTOR ............. 87 ...5 K EY RATIOS –HOW CAN THE COMPANY USE THEM IN ORDER TO SHOW THE ”RIGHT ” NUMBERS ? ..........................................................................7 D IFFERENCES BETWEEN SWEDISH AND FINNISH ACCOUNTING REGULATION TIETO -ENATOR ...................1............. GOODWILL .....A PART OF ”THE NEW ECONOMY” ................................ 11 2.......................................... 58 5....................................................................................................................2 W HY HAS IT / ” THE NEW ECONOMY ” GROWN SO FAST ?....................................... I NTERPRETATIONS OF GOODWILL ....... I 1............................................................................................. 72 5...........3 1.............. 1 P ROBLEM ANALYSIS ....................2 T IETO ENATOR .................................4 T HE ANNUAL REPORT ............................6 K EY RATIOS AND INCOME MEASURES IN THE CHOSEN COMPANIES ........................................ 75 AFFECTED MERGER DISCUSSIONS FOR 6................... 19 3..........................5 B ACKGROUND .......... INTRODUCTION.......................................................2 A CCOUNTING CONCEPTS ...........2 T HE NEW ECONOMY – HOW OLD IS NEW ? ............ 15 2............................ 51 5. 6 P URPOSE ..................................4 R ESEARCH DESIGN . 7 O UTLINE ....... 35 3............................ METHODOLOGY .... 83 7........................................... 21 3..............6 Q UALITY OF RESEARCH ... 11 2..4 1................................................................................................................................. 78 6.......................Table contents of GOODWILL .................. 1 1.......... 16 2................................................................................ 34 3..............................................................2 1........................................ 46 5............... RULES AND REGULATION ON INTANGIBLE ASSETS ...............3 A S WEDISH OUTLOOK ON THE IT SECTOR ....................................................................................................................3 Q UANTITATIVE OR QUALITATIVE ............. 16 2................................................ COMPANY CLOSE-UP .......... 10 2.................................................................................... ANALYSIS ...................... 37 4.................................................................... 14 2....................... THE INTERNET SECTOR........................................................................................ 53 5..............1 1............. 77 6. 7 S COPE AND LIMITATIONS ......................................................1 H I Q INTERNATIONAL AB ..4 A N OVERVIEW OF THE SELECTED COMPANIES FROM INDEX FROM AFFÄRSVÄRLDEN ...........................................................................................................................1 G OODWILL AND ACCOUNTING REGULATIONS ................................................................................................5 D ATA COLLECTION ........................

......... ................................. ... ERROR ! B OOKMARK NOT DEFINED ............................................................................................................................................................................................... I APPENDIX 2 ....................................................................................................... 99 8............................................ 102 BIBLIOGRAPHY ....... APPENDIX 3 ..... APPENDIX 1........ IV OTHER CONTACTS ...........................................................2 S UGGESTIONS FOR FURTHER INVESTIGATION CONNECTED TO OUR FIELD OF RESEARCH ..................... 99 8.......................... I INFORMATION FROM THE INTERNET ........................................................................................................................................................... I THE MAGAZINE AFFÄRSVÄRLDEN ´S WEBSITE AT 2001-07-20 ............................................ II QUESTIONS TO HI Q INTERVIEW 2001-11-06 ................1 C ONCLUSION ...........................................................................................Table contents of 8. CONCLUSIONS AND REFLECTIONS.... V II ..............................

1 .1 Background What is sector? the IT The rapid development and change in the IT (Information Technology) sector growing number of services connected to IT are factors that make and the it difficult to clearly define the IT sector. IT – an Engine for Growth. In September 1998 the OECD Committee for Information. in the “the Economy”. This expression. Ds 2000:68. p 30. 3 1 2 3 Det nya näringslivet. namely the production of hardware and the production in two of IT services. The perhaps controversial expression “the New Economy” is discussed further in separate part of our a thesis. sales and so forth working concerning computers and IT 1 solutions.Introductio n 1. can be regarded both as a name for the IT sector and as New a description of the type of development on a macroeconomic level which is characterised by economic growth. Computer and Communication Policy established a definition of what the IT sector should The sectors included according to the OECD definition can be include. pp34-35. INTRODUCTION 1. and partly the service sectors with software. 2 Information technology and its fast spread are regarded by many as a key factor development of what is called the New Economy. increasing employment and low inflation. consulting. One of the more frequently used definitions of the IT sector is that it consists of partly the industrial sectors that manufacture computers and telecom equipment. support. dividedmain categories. Ibid.

pp 30-31.g. information technology. closely followed by countries like IT. in Sweden – a Remarkable Sweden today is considered to be one of the leading IT (Information countries in the world. ranked Sweden as the world’s leading IT country. has a relatively Denmark. Risks considering an emerging competition were neglected. In 1999 the export from the IT sector amounted to 19 GNP % the total Swedish export. It which was considered a great advantage to build sizeable companies through acquisitions 4 5 6 Det nya näringslivet.. He meant that no facts really supported the high price level. 1999-08-28 2 . the analysis Technology) company IDC. The gross export from the Swedish IT sector was of by e. During the period 1993-1999 the IT sector represented roughly 25 % of the total growth in Sweden.) Norway. In one article published in the Swedish business paper “Dagens Industri” in August financial analyst from Swedbank presented his opinions about the 19996 a high share prices in the Internet sector and if he considered the Internet companies to overvalued. IT infrastructure and there is a high level of profficiency in IT at well developed user Many Swedish companies are in the forefront in the age of level. (considering the age of for the second year in a row. Ibid. Share prices for many Swedish IT companies reached an all time high. p 27. be The investor’s valuation base for a number of companies was expectations about a persistent high yield and growth. the United States and 4 Sweden Finland. higher than the export from the total Swedish forest 5 then industry. Organic Strategy often Versus Acquisition Growth One significant factor in the very fast growing IT sector was the speed with many IT companies grew through a number of acquisitions.Introductio n The IT Sector Development. Linnala. In February 2001.

7 8 3 . The market had confidence in the potential of companies that had acquisitions total strategies.Paying Too Much for Too Little? During year 2000 the positive development for most Swedish IT companies a dramatic turn downwards. accounts of the acquiring companies. A number of the fast growing companies had to reports make immense lump sum write-down of goodwill at the time of year end closing. for valuation of the acquired companies was market price (or The base share which in many cases resulted in enormous goodwill items in the price). makes it obvious that there is often a clear discrepancy between on the one hand the value of assets and liabilities in a specific company and on the other book hand the market value of the same company. to around 1. 8 What is Goodwill? – The Debate in Sweden. listed IT companies made a total loss of about 7 billion SEK in the Swedish year In 1999 the total profit for listed companies in the sector amounted 2000.Introductio n rather than growing by the companies´own operative business. Ibid. share prices fell considerably changed into and companies were facing severe problems. pp 4-5.5 billion SEK. A majority of the acquisitions were made when prices were eight or nine times as high as they were at the end of share year For a number of the acquiring companies. 2001-02-28. One of the problems many that management and auditors had to face was the valuation of goodwill in the annual for year 2000. was to pay for the acquisitions by issuing new shares in growth their own highly valued 7 companies. making possible. one crucial condition of 2000. It is Hedensjö. One example of this is when an acquisition results in a goodwill item of high value in a group’s accounts. Goodwill in the IT Business . The development of the Swedish IT companies during the last few years.

Other capital and critics that goodwill or intellectual capital is the only asset in many suggest knowledgeintensive companies and they find it bizarre to amortise this only asset before it generate income. point out that the aim of annual reports is to currently provide a reflection of the market value of a specific not company. unrealistic pricing. but with the. Another point of reference is that the problem does not really have to do with goodwill.Introductio n clear that the market value or acquisition price contains a compensation for values or assets that are not recognisable in the balance sheet. This fact raises the question weather annual reports or group accounts prepared in accordance with traditional accounting principles in a “correct” way reflect the of a company or not. will make it harder for IT companies to develop and reduce their capacity. as intellectual they argue consequently that goodwill does not exist. The IT defenders of the accounting principles of today. 9 Knutsson. The importance of open disclosure sheet and income statement is crucial for the ability to outsiders in balance in judging the management’s capacity to integrate acquired companies. Opponents of the accounting principles used today mean that goodwill is something that belongs to “the Old Economy” and is not applicable to knowledge-intensive companies in “the New Economy”. 2000. The importance of extensive disclosure. future dividend On the other side we find those in favour of today’s accounting principles. a fact that of course has an effect on the income accounted for. during the last few years of shares in companies. which traditionally has been referred to as goodwill. Some consider the surplus value. According to Swedish legislation goodwill has to value be amortised. Others mean that accounting for goodwill and above will all amortisation of goodwill. share prices reached new heights. pp 12-13 4 . not only in balance sheet and income focusing on human capital. The defenders argue that goodwill is an investment like any other investment and consequently with that should be amortised. is pointed 9 statement out. In spite of losses.

When times were good. the arena for information technology companies have changed drastically. one of examples the that have gone through the ”hard years” almost unharmed. The Flow of Knowledge). This became great when the ”bubble” worry and focus started to change from high burst to the worry of small if not nonexisting profits. IT-companies are knowledge-based companies and this category has been defined by Karl-Erik Sveiby in his book ”Kunskapsflödet” (in English. and in Sweden FASB a maximum of 20 years is accepted in certain circumstances. have had other about mergers and acquisitions. the burden of amortisation of goodwill has been heavy at the same time as earnings have been low. gone from being a narrow path only for a few users. For these three.Introductio n During the last few years. one of many Swedish IT-companies. the ”goodwill issue” was of great concern. In USA. the 10 year depreciation is recommended in Sweden. to a broad highway for millions of users. since the industrialised world uses different ways to amortise these items. 1995. and goodwill items share prices that have to be amortised with profits that were planned to occur but didn would ´t. If this is not possible. where rules. few the second company in our research that we look at more deeply. pp 16-17 5 . Framfab is only one example of an IT-company that is struggling to survive. is to be done in consideration of every asset´s life length. during the last few decades. the future looks ideas quite different and the acquired goodwill has a large part in their future possibilities. He says 10 (author´s translation) that knowledge companies often 10 Sveiby. tangibles and intangibles. mainly for national security only. 40 years is maximum. in Europe (IASB) 20 years. the so called ITgrowth companies. For Framfab. This great has brought a new kind of companies. The use of information technology have. Another from the sector are HiQ (which we examine in our thesis). Tieto-Enator. The depreciation of assets.

1989. In our work. and often gives complex solutions. we will focus on IT-companies and their handling of goodwill. This in accounting has been highly discussed and focused on lately among item these companies. 1.2 Problem Analysis In this part of our thesis we declare why we want to conduct this study. highly dependent on the individual. we have to describe the main issue of our to do work. accounting firms. p 10 6 . In order that. The different ways of handling in the Annual Reports will be discussed and analysed in this goodwill thesis. ________________________________________________________ Is traditional accounting regulation applicable on companies in ”the New Economy”. The burden of amortisation of goodwill has been hard to handle since expected earnings do not meet expectations. Sveiby gives some examples of knowledge companies. law firms. highly educated personnel that often solves complex that vary from case to case. covering ________________________________________________________ 11 Arbetsgruppen Konrad. companies.Introductio n consist of competent. where growth through acquisitions was believed a key success factor superior to organic growth? In order to highlight this area of accounting. and ITadvertising companies. The production in these companies problems have shown by Arbetsgruppen Konrad 11 and is categorized like this: been not standardised. we extended our study by describing how Swedish IT-companies handled purchased goodwill in their Annual Reports year 2000. creative.

An international outlook on accounting regulation is also presented. 1. To enhance regulation the understanding of the topic. To visualise this we find it necessary to give a background concerning the rules and regulations dealing with goodwill. Two companies have been analysed more thoroughly which has brought a deeper insight to our study.3 Purpose The purpose with this thesis is to study Swedish IT-companies´ Annual Reports 2000 and focusing on the treatment of goodwill.4 Scope and Limitations Scope This thesis is written to those interested in goodwill handling and accounting in the Swedish IT sector during year 2000. The ITsector from traditional business life. Our aim is to see covering if strategies have affected them concerning amortisation of goodwill and their if accounting rules are applicable. we find it necessary to give a wider picture including environment connected to this area. on both national and international levels? • In what environment do the chosen companies act. supply a more extended 7 . A case study on two business selected companies will knowledge.Introductio n In order to visualise this issue we have decided to study the topic from the following angles of approach: • What are the different definitions of goodwill and intangibles? • What regulations are applicable concerning accounting for goodwill. Therefore we add a brief description of differs the sector and study the factors that are significant to ”the New Economy”. and how does thisaffect the practice of accounting for goodwill? 1.

Introductio n The thesis is designated primarily to business administration students and students within commercial law with an interest in accounting and accounting rules. Limitatio n There was an intense debate about the treatment of the enormous goodwill items Swedish IT sector in the end of year 2000 and in the beginning of in the year Newspapers and magazines covering the business world published quite 2001. two two IT companies with a more positive development during this year than many of their competitors have had. To get a broad picture of our topic we have looked into the annual reports income year 2000 of all the selected companies classified as IT reflecting and Internet Companies by Affärsvärlden in July 2001. a number of articles on this subject. this grouping to be well established and frequently referred to. This raised our interest to take a deeper look the theme goodwill in the IT sector. In Chapter 5 we present HiQ and TietoEnator. We find the theoretical framework regarding intangible assets important as a base for a describing accounting regulations concerning goodwill. principalschoice not subject to regulation on a national or international of and is basis. The Choosing companies gives another Selecting the companies referred to as limitation: Companies” according to “IT and Internet a classification established by the Swedish business magazine “Affärsvärlden” of 2001-07We consider 20. To get a more 12 12 Knutsson. 2000 8 . This gives one of the reports limitations: like to point out that our assignment concentrates on We would external accounting Internal accounting offers a higher degree of freedom in the . To get a deeper insight in companies discussed the issues concerning goodwill. we have carried how out case studies. Our thesis will focus on how into Swedish IT companies accounted for goodwill and amortisation of goodwill in the annual reflecting income year 2000.impact of goodwill on key-ratios is reflected on in chapter 5.

we decided to deal with intangibles in a wider context in Chapter 3. 2000. The active work by the Board) are EU Commission in supporting IASB’s work is one example of this. There are suggestions to make IASB’s standards regarding group accounting compulsory for listed companies in Europe. pp 31-32 9 . Still. 13 More about international standards as regards the goodwill issue presented inis chapter 3. it may be worth to mention that there is a debate about IT goodwill created inside companies going on and the possibilities to get intangible assets capitalised are discussed. The debate concerning how to account for goodwill is definitely not a national phenomenon. It is noteworthy that standards set by IASB (International Accounting Standards growing in importance internationally. We exclude this debate in our thesis in favour of a logical focus.Introductio n comprehensive background to what goodwill is and how it is accounted for. When discussing goodwill we have a third limitation: purchased goodwill and issues connected To discuss . To a small country like Sweden the growing internationalisation of accounting standards is important and will make it easier for Swedish companies to establish abroad and to be listed on foreign stock exchanges. 13 Knutsson. Immense changes of regulations covering this field are taking in the United States and will probably have an impact on place international standard setters outside the United States. The reason for hereto acquired goodwill is in focus due to the growth through acquisitions in this is that the sector.

Introductio n 1.5 Outline Chapter 1 Introduction Presentation of Our Issue and the Focus of the Research Chapter 2 Methodology The Work Securing the Quality of the Thesis Chapter 3 assets Establishing Goodwill Chapter 4 Economy” Goodwill – a part of ”the New Influence by External Forces on the Accounting for Goodwill Accounting for tangible / intangible the Framework for Accounting for Chapter 5 The Internet sector – overview The Selected IT Companies in focus Chapter 6 Company closeup HiQ and TietoEnator Chapter 7 Analysis Chapter 8 Reflections Conclusions and 10 .

The chosen research approach will be presented.1 Research Approach The choice of research approach depends heavily on the degree of precision on which the original research question can be formulated. to combine the main issue of the thesis with therefore. as well as scientific approach and the research design. The purpose for this is to legitimate the information used and to ensure main the accuracy of sources. and how much knowledge that exists in the area of the chosen subject. We acknowledge that when conducting research activities. 2. it is of outermost to see to that methodological issues are ensured. and how we work to present the data as precise as possible. It is also importance important. Also. this. we will present the the data collection process and also discuss the quality of our research. METHODOLOGY In this chapter we present the way we have chosen to secure the information collected and analysed. Importance Methodology of Various methodological approaches can be used when conducting research. One way of discussing approaches is to use Patel & Davidsson (1994) that state the research 3 characteristics : (1) Exploratory (2) Descriptory (3) Hypothesis testing 11 .Methodology 2.

The researcher collects and makes hypotheses that will be tested in the empirical world and which will result in acceptance or rejection. but also why it was handled in a the specific accordance to certain given conditions. the study becomes exploratory. As explained. In that way. We will explore and describe how 29 companies during the in sector handled goodwill in their annual reports covering year this 2000. Huge goodwill items were created in many Swedish IT companies end of the 1990s. study whether traditional accounting seems to be applicable we aim to to companies that take part in “the New Economy” and are growing mainly through acquisitions. fundamental. This designates that the problem is analysed from problem a number of different points of view.Methodology Exploratory When information is insufficient. The main purpose with exploratory studies is to collect as much knowledge about a certain area as possible. These companies are way in dependent on environmental factors like accounting regulations. Chosen approach The main issue for our thesis work was presented in chapter one. we find it important to present facts that give the frames of reference to the reality in which the Swedish IT companies act. only the essential aspects of the phenomenon are In looked The descriptions of these aspects are detailed and upon. we also be able to try to describe not only how goodwill was accounted for may in annual reports of the 29 companies. Descriptor y a descriptory study. In order to be able to describe our findings in the Annual Reports in a way as correct as possible. Hypothesis testing This method is used where information is extensive enough to form new theories. This type of study often provides a basis for further research. international influences and 12 .

In connection we dealing with have explored literature on the harmonisation process. both the exploratory and the descriptory approach is suitable and chosen for our study.Methodology interests from different groups of stakeholders. In order to understand how the Swedish Internet companies use and discuss accounting for goodwill. 13 . We find it important to describe the interaction between the different parties involved in the course of events surrounding the Swedish Internet companies as a background to our issue. we have conducted an exploratory research of the Annual Reports as well as literature covering the fields of accounting regulations intangibles. Since the topic of our thesis needs to be looked upon from different perspectives. specifically in goodwill.

1998.2 Positivistic and Hermeneutic Perspective ”Today we have two main scientific directions. p 233 14 . p 201 Ibid. The former is based on the idea on knowledge as ideal.Methodology 2. the positivistic and the hermeneutic perspective. the other is related 14 and knowledge” The differences below Positivistic Hermeneutic Scientific ideal Testing Observing Objecifying Neutral value Vision reality of Mecanisms systems Laws of connection of of causal Interpretin g Subjectifyin g Neutral value Objectives life Explanations of causal connection Legitimation s of on are visualised 15 : 14 15 Eriksson. 1998. Widersheim-Paul.

The other. Widersheim-Paul. A lot of data lies somewhere in between these unit is two. Furthermore. or how a service valued by customers. and a weigh fast investigation quality. s 65 The double arrows between the variables indicate that a researcher must always in. Should we have had unlimited cash and time. that in research. we have tried to collect the best data available. quality often brings higher costs. 15 . but our work has been conducted with of reference to the actual point conditions.3 Quantitative or Qualitative When doing scientific research one can choose between two types of data when collecting information. considering the three variables. number of sold units and so on. the research could have been done in another way.Methodology 2. when collecting data the researcher has to weigh between three variables : speed cost quality Source: Eriksson. can bring down When collecting data. and like the its effect on life around the other lake. measuring pollution in a lake. qualitative data can be exemplified with soft data like function. One way is to choose quantitative (often called hard information) like earnings in dollars. one is units of poisoning in water.

The opposite is the inductive approach where the research earlier explorations. in the reality. together with previous theories. Also the abductive approach is presented by Alvesson & Sköldberg (1994) where the researcher uses a combination of the above approaches and from this creates an analysis of the empirical findings. Primary data is information that is collected for the first time. In our thesis. One explanation is that the chosen information is rather new.5 Data Collection Collecting data for the thesis is of outermost importance to the relevance of the outcome of the problem solving. We want to show an overall picture of our problem. The deductive approach candescribed as when a theory concerning the chosen subject exists and be a hypothesis is formed from this former theory. method a blend of primary data and secondary data have proved to be the best. The chosen alternative depends on which that produces the best answers relevant to our problem. Kam (1990) discusses two of these. The researcher is primarily conducting follows observations From this a conclusion is drawn. An established practice auditors and business administration in the chosen companies are among present. 2.4 Research Design We will present the three main ways to form a theory. chosen not to examine a theory since we want to visualise our We have problem rather than prove a point. we have found no other research. The research examines whether the existing theories are combined with reality by making observations to these existing theories.Methodology 2. experimental or non-experimental research. the inductive and the deductive approach. Eriksson and Wiedersheim (1997) guide on methods to conduct this important task. The advantage with 16 . and a theory is formulated. Concerning the regulations we have used the information that comes from regulators and voices from the debate around the issue. as far as the IT sector year 2000. It can be collected by two methods. On the subject we have chosen.

The disadvantage is that it can be costly to collect. goodwill. Also. data can for example be books or articles that are available for and external the 16 . purchased intangibles. like statistics. contact with an auditor to data and material relevant to the has led subject. company One of these was Turnit that provided a more thorough discussion concerning its thoughts around goodwill. literature. Also. After studying how the companies had discussed goodwill in their annual reports concerning year 2000 and after literature studies connected to this ( “Tendenser I börsbolagens årsredovisningar 2000”) we became interested in some companies. p 139 17 . We also searched for material concerning the rules and regulations concerning which includes the core of our work. 1996. With the ambition to provide a deeper insight into how the accounting issues concerning purchased goodwill were discussed inside a number of the IT companies in our selection.Methodology primary data is that it can be adapted for the purpose of the specific theme. This kind of information can be divided exactly into internal or external data. The purpose of this cannot match the ”new” research. We also searched for literature and articles on the Internet and in the library at Handelshögskolan. We tried several times both by mail and phone to be 16 Kinnear & Taylor. Secondary data is information that exists already. reading magazines daily gave us fresh information on how our problem business was handled during the time we conducted the research. we aimed to conduct a small number of case studies. public We started with gathering the Annual Reports from the Affärsvärlden Index for Internet consultants and looking into them.of law and electronic sources which all contribute to form a material wider perspective and are of course essential for this thesis. to discuss goodwill in a more extensive way than the that seemed average did. Internal data can be data collected within a company.

The result from this is presented in chapter six. WM-data was another company that was subject to our interest for an interview. We are aware of the fact that the head office follow in Finnish regulations concerning goodwill accounting. The most common mistake when conducting interviews is that the purpose is not 18 . TietoEnator is listed both in Stockholm have andFinland. We conducted an interview over e-mail. Due to that he claimed that he could not assist us in our thesis work. for our interest in WM-data was again the fact that the company The ground had comprehensive thoughts disclosed around the goodwill rather issue. We were successful in getting contact with Ms Lemström at Shareholders’ and Public Reporting at the Finnish head office.the opportunity to conduct an interview in Stockholm with We had Anna Jennehov. more international and with a more intense acquisitive strategy. Unfortunately to us WM-data has just appointed a new CFO. but unfortunately the CFO considered too herself busy. We had better success in our efforts to meet the CFO at HiQ. We contacted TietoEnator. In chapter six we describe the results from our the interviews with HiQ and TietoEnator and the facts that affected our efforts to conduct interviews with companies. which is another with more profound discussions in its disclosure concerning company goodwill. since we did not the possibility to go to Finland. who did not participate in the work with annual report concerning year 2000.Methodology able to meet the CFO for an interview. the CFO. which we found interesting as an opposite pole to HiQ. TietoEnator is a considerably bigger company in terms of turnover. We are convinced that the current negative market other situation and the difficult financial positions for most IT companies in Sweden have had a major impact on the willingness to discuss perhaps controversial issues regarding accounting for goodwill. which we point out further in our thesis.

This can cause an uncertainty in the data collected and lowers the legitimacy of the outcome. The respondents from the selected companies have of course answered with politically correct answers. from our knowledge base concerning who wrote it. Naturally. are reliable. our ambition throughout the work with thesis has been to handle all information with this objectivity. Validity is defined as the absence of systematic errors of measurement. 19 . the outcome. The answers by the respondents are weighed together with our knowledge of the company and our ambition has been to handle the information from an objective standpoint.6 Quality of Research When the scientific value of a reports is discussed. the purpose forwriting it and to whom it was written to. Internal validity handles the question whether the authors in the research measure what is supposed to be measured. We have prepared for the interview by talking to the respondents beforehand and explaining both purpose and subject of our thesis to them. books and other sources of information are questioned and valued Articles. and we are aware of this fact. Reliability is defined as the absence of random errors in the research. with high That individuals that conduct the research do not affect the is. In our research. 2. internal and external validity. A research reliability is not affected by the person conducting the measuring. but this fact The is known to us. External validity on the other regulates the relationship between what was measured and the hand reality. we have used sources that as far as we know. Validity is divided into two sub-groups. the concepts of validity and reliability are frequently used. external voice might not be the one that works internally.Methodology clearly stated to the respondent.

Traditiona l Accounting Stakeholders Purchasing Strategy Goodwill Internationa l Influence Swedish ITSector ”the New Economy” 20 . Some may argue that the work.Methodology Planning thesis: the When looking into this subject. Our figure aims to illustrate how we consider different concepts and forces to have an impact on goodwill on their own. we should have put all data on for example goodwill in one chapter but then we would have lost the peripheral picture we want to show. why we have chosen to describe goodwill from different This is perspectives this through thesis. as well as interact with other factors. we have chosen to discuss the topic all through This is to show different angles on a subject.

and formerly known as IASC) will even widen the gap between the two frames of regulations. bodies decide. questions about of the how companies should account for intangibles like goodwill have raised interest in many countries.1. regulations dealing with accounting for goodwill basis.Rules and Regulation on Intangible Assets 3. We will discuss this topic more thoroughly further on in this chapter. the speed of technological change. The aim of financial statements is to provide a wide range 17 Radebaugh and Gray. Rules and Regulation on Intangible Assets In this chapter we establish the framework for how the regulation handles which is an intangible asset. 3. According to recent changes in regulations dealing with goodwill and other intangibles. and how the different power goodwill.17 have been an area where international differences are notable. There are several factors behind this development: the increase of international mergers and acquisitions. Consequently of this. the impact of Information the major expansion of the service sector and a tremendous Technology.1 Goodwill and Accounting Regulations. 1997 21 .1 Introduction Accounting for intangibles has been a question of growing importance. A useful background to a discussion about different methods of accounting for goodwill may be given by a brief look at the conceptual issues underlying financial statements. 3. growth international financial markets. interact and react. differences between FASB (Financial Accounting Standards Board) in USA end recommendations issued by IASB (International Accounting Standards Board. The interest of accounting regulations in this area is international and issues should therefore not be solved entirely on a nationalIn spite of this.

its value in economic terms. p 270-271 22 . When discussing goodwill in connection to the Swedish IT-sector further on in our thesis. “The purpose of the balance sheet is to provide an indication of the financial strength of a company inway that should help users to judge the ability of the company to meet a its obligations.2 Goodwill – the Concept. reliable. 18 By this follows the central question whether the balance ” sheet should reflect the purchase cost of an asset. depending on which method arise of accounting that is used. that is goodwill which may in connection to an acquisition or merger. 18 19 Radebaugh and Gray. Full disclosure about the of relevant information about the nature and the treatment of the intangible assets is important. indicates that what really has an impact on share prices is not the Research actual accounting methods chosen for the treatment of intangibles. 1997. We have decided to discuss purchased goodwill. 3. To fulfil expectations of future economic benefits as well as a reliable this. our focus consequently is on purchased goodwill. In connection with this it is important to judge of the assets the uncertainty of future economic outcome with prudence. Goodwill that is created within a company (sv: upparbetad goodwill) does not appear in the companies accounting unless a transaction like an acquisition or merger takes place. 1997. Recognition is must a central concept dealing with the reporting of assets in the balance sheet.1. the perspective of the stock market research indicates the fact that From all publicly available information very fast have reflections in share prices. comparable and understandable.. p 269 Ibid. Disclosure in this area should include qualitative information and quantitative non-financial 19 information. measurementare required. or both. but the disclosureintangibles and how they have been accounted for.Rules and Regulation on Intangible Assets of stakeholders information that is useful for decision-making and to hold management accountable for the company’s resources. The information givenbe relevant.

that is when the purchase price is less than the fair value of the assets acquired. to account for a merger is to use the equity method. Technically goodwill is might the difference between the price for the acquired shares in a company and the valuethe identifiable of liabilities. Another factor pointed is not used out 20 21 Radebaugh and Gray.Rules and Regulation on Intangible Assets There are several ways to explain what goodwill is. since the nominal value of the shares issued and not the market value is recognised. Proponents of this method base their viewpoint on thoughts that purchased goodwill is not an asset for the aim of financial statements. they the valuation of a business as a whole. pp 272-274 23 . of consolidation of associated Situations may occur when goodwill is negative. Goodwill is a residual that appear when using acquisition accounting. 21 but three main approaches can be crystallised: 1.3 Goodwill Methods Accounting There are several methods used internationally for the accounting of goodwill. mean that it is not possible to separate goodwill from Further. Immediate write-off of the cost of goodwill against shareholders’ equity. Considering the pooling-of-interest method goodwill is of no matter. which may A third way be used in case companies. can also be explained as “a premium paid to reflect the future Goodwill earning capacity of the 20 acquisition”. Another argument used is that goodwill up like other productive resources. Goodwill in this situation is often referred to as purchased goodwill. assets and Put in another way goodwill can be referred to as the excess of the purchase a company over the fair value of the net assets acquired by the price for buying one. can only arise in situations where purchase accounting is Goodwill applied. 1997. p 271 Ibid. 3.1.

for example in Switzerland. Capitalise goodwill as an asset with systematic amortisation.Rules and Regulation on Intangible Assets is that the true value of goodwill is not corresponding to the price paid on acquisition date. In Sweden the maximum period is twenty years. This method factors and of accounting for goodwill is allowed in countries like Germany. to forty years (the United States and Canada for example). Most countries specify that the time for amortisation should be based on the concept of useful period economic life without giving notice of a specific maximum time period. Switzerland. it should be amortised systematically against earnings. Capitalise goodwill as an asset without amortisation. 3. When a business is successful the value given of goodwill is maintained and amortisation is therefore not motivated. Since the value of goodwill value will be used up in the same way as other resources in a company. This method of accounting for goodwill is permitted only in a few countries. The arguments for this procedure are based on the opinion that goodwill should using be capitalised because of the expected future economic benefits that has been valuable consideration. 24 . The time period for systematic amortisation of goodwill differs in a striking way between The time span embraces maximum periods from five (Japan) countries. Otherwise the future earnings overstated and misleading because it would be a mistake would be to include all costs caused to generate those earnings. the United Kingdom and within the European Union. 2. The advocates of this method suggest that goodwill is an asset representing the of economic benefits in the future. Instead the true value will be influenced by the economic by changed perception from investors.

standard appoints for a compulsory application of the purchase This method merger has taken place. The pooling of interest method has been therefore widely companies growing by acquisitions in USA. an amortisation period between five and ten is most common. Immense changes in the regulations concerning the accounting for goodwill and intangibles issued by FASB (Financial Accounting Standards Board) other are taking place. Goodwill is allowed to be amortised over an an extended must not exceed forty years. which will replace APB 16. 1997. FAS 141 FAS 142.Business Combinations. In practice. This has been the case for used by a number of companies in the new economy. has frequently used this accounting model rather than purchase accounting. 2001. Large companies making important acquisitions years often up to forty 22 use years. FASB has recently published two new standards. since Radebaugh and Gray.1.S.1 The U.4.4 An Outlook International 3.A – FASB The two methods of accounting for business combinations. FAS 141 . According to the American standard purchased goodwill shall be capitalised as asset with amortisation. Purchase Method and Pooling of Interest have been generally accepted in practice since 1945. will drastically change the regulations concerning how to account since they for goodwill. There has been an intense debate in the USA about these and changes.Rules and Regulation on Intangible Assets 3. p 273 Powell . where most of the assets cannot be attributed to hard 23 The well-known Internet equipment maker Cisco assets. www.1.eLibrary. which in comparison with most period that other countries is very liberal. FASB is the American body corresponding to the Swedish body Redovisningsrå 22 23 25 . This means that the pooling of interests when a method no longer is applicable.

2 Gooodwill Accounting According to IASB (former IASC). and with varying 26 The 3.1. 27 One effect of FAS 142 may be that there will be larger fluctuations in a company’s net profit for a year since the write-down requirement will occur irregular amounts. a line of business or a department. The IASB is Board 24 Kahn. FAS 142 – Goodwill and Other Intangible Assets. goodwill established at the date for acquisition should be evaluation of allocated “Reporting Units”. p 5 26 Rankin Johansson. A restructuring of IASC (International Accounting Standards Committee) has resulted in the creation of IASB (International Accounting Standards Board). will or 25 later . 141. 2001. 2001-09-07. At every reporting occasion companies are obliged to test whether the intangible assets considered to have a constant economic life. FAS pooling does not require the buyer to record goodwill. In this connection a “Reporting Unit” may be to distinct a company. Furthermore. p 5 26 . According to FAS 142. IAS 22. In case of establishing still are the that one intangible is considered not to have a constant economic life fact any amortisation should be carried out for the rest of its useful more. This new standard will come into 1 January 2002. come into force for mergers that take place after June 30 2001. an independent accounting standard-setter based in 25 FAR INFO 12/2001. pp 14-18 27 FAR INFO 12/2001. life.eLibrary. according to which intangible assets are supposed to have a limited economic life. goodwill and some other intangible assets will be considered to have a constant economic life in contrast to APB 17.Rules and Regulation on Intangible Assets 24 The new standard. but is already applicable for goodwill acquired from force June 30. the possible need of a write-down should be tested on a yearly or more often in case of an indication of a write-down basis requirement. www.. Replacing APB 17.

Impairment of used when there is persuasive evidence that the useful life of may goodwill a specific period longer than twenty years. can be exceeded in rare maximum cases. The essence of IAS 22 may be summed up in the following way: An acquisition is defined as a business combination in which one of the enterprises obtains control over the net assets and operations of another in exchange for the transfer of assets. In 1998 the IAS 22 was revised and this new version became for annual financial statements covering periods on or after 1 operative July 1999.iasb. p 241 27 . If there is persuasive evidence that the useful life will exceed twenty years the enterprise should amortise the goodwill estimated useful over its 2001-10-26 . According to the will be amortisation in IAS 38. The difference between the cost purchase and the fair value of the net assets is recognised as of the goodwill. The most important change in the revised IAS 22 is the fact that the absolute useful life of goodwill.Rules and Regulation on Intangible Assets Members originate from nine countries and co-operate with national accounting standard setters. 20 years. Intangible Assets. The aim of IASB is to develop global accounting standards of high quality around the 28 world. IAS 22 (International Accounting Standard 22) Business Combinations became for annual financial statements for periods beginning on or after effective 1 January 1995. an enterprise should amortise requirements the goodwill over its estimated useful life. The goodwill value should be tested for impairment on an annual basis in accordance with IAS 36. Rundfelt. incurrence of a liability or enterprise issue of equity. 1998. IAS 22 applies for disclosure of factors that are of significant importance in determining the useful life the of 28 29 29 This www. The acquired assets and liabilities should be included in the consolidated financial statements at fair value.

IAS 38. IAS 38 builds on IAS 22 . The reason for this is “to emphasise that if intangible asset does not meet both the definition and the criteria for an the recognition for an intangible asset.This standard deals with the whole spectrum of on or after intangible the case of a business combination. the expenditure for this item (included in the of acquisition) is to be defined as goodwill rather than an intangible cost 30 asset” . 30 that is considered to be assets. 2001-10-27 28 .iasb. An enterprise is not permitted to assign an infinite useful life of goodwill. Intangible Assets. In an acquisition.Rules and Regulation on Intangible Assets goodwill. came in force for annual financial statements covering periods IAS 38 beginning 1 July 1999.

pp 14-18 Ibid. It should be pointed out that according to FASB there is requirement for the diminuation of value to be permanent. It is enough that a diminuation of value is established to force a company to write down the intangible in question. 31 In accordance with IAS 38 the opinion of IASB is that all intangible assets. including goodwill. of IAS 3. a write-down must be done.6 The European Union (EU) .The Seventh Council Directive on Consolidated Accounts. This is not the fact according which requires a permanent decrease in 33 to IASB. like goodwill.1.1. to have a constant economic life. have limited economic life. between FASB Regulations and IASB FAS 142’s new attempt meaning that an acquired unit should be considered as an integrated part of the new group lacks equivalence according to IASB’s Due to IASB’s standards there is no possibility to allocate goodwill standards. 3.of goodwill or of some other intangible assets. Ibid. consequence of the new rule meaning that some intangibles have This is a a constant economic life. FAS 142 identifies some kinds of intangibles to have a limited economic life and some. The new regulation down is definitely much more severe than the old one. value. As soon as no a depreciation is a fact. 32 FAS 142 does not require a permanent decrease of value to demand a write. As mentioned above. 29 . 31 32 33 Rankin Johansson.Rules and Regulation on Intangible Assets The requirements for amortisation of goodwill in IAS 22 are consistent of those 38 .5 Differences Regulations. 2001. to Reporting Units attributed to the acquiring party.

case when a company can prove that the actual value of This is the goodwill exceeds value.with this is to bring the nations closer to the idea of one market The aim within the EU. EU. all member states within EU share identical accounting meaning that standards. The Seventh Directive extends deals the requirements of the Fourth Directive by giving the regulations on consolidated groups. The Seventh Directive is considered to be a accounts of compromise practices used in the different member countries. Directive whichwith the accounts of single companies. In Great Britain and in France there is area a general acceptance of depreciation over a time period beyond twenty years. plays a central role in the international work dealing with standard setting in the field of financial accounting. against shareholder’s equity. A general accepted accounting standard is to account for goodwill as an asset. The Seventh Council Directive on consolidated accounts (83/349/EEC of 13 1983) is implemented in the national laws of all EC member countries as June a part of the harmonisation process of accounting in Europe. Member states are allowed to choose one or more of these alternatives in their national legislation. The Seventh is an extension of the Fourth Council Directive (July 1978). the Seventh Directive permits three alternative methods: Immediate write-off against reserves. One important aim with the standard setting work within EU is to bring the accounting standards of different European countries to reach harmonisation and to be standardised. not exceeding economic life (Fourth Directive. capitalisation and subsequent write-off over up to five or capitalisation and write-off over a period longer than five years but years. and French companies also have a possibility to choose not to British depreciate. Article 37 ). 2000.1994. since the variety between the of methods in use was very broad in several countries. regulations set by EU permits goodwill to be directly written down Still. The time period used for depreciation of goodwill is an where disparity is more obvious. p 125 30 .Rules and Regulation on Intangible Assets The European Union. pp 215-239 Rundfelt. 34 35 34 the book 35 Thorell and Whittington. Concerning the question of goodwill.

7 Sweden 3.”). Earlier the regulation had permitted a longer period years of amortisation in case of specific circumstances. In this the legislation should be applicable not only to limited companies. In the mid 1970’s the legislation was transferred to the Accounting Act (Bokföringslag 1976). (the Swedish Financial Accounting Standards Council) a new recommendation applying for accounting of goodwill published on consolidation as an asset. The amortisation should charge the consolidated income statement. FAR’s was Accounting recommended in 1987 that goodwill on consolidation may Committee be amortised for a longer period than ten years in special cases.7.Rules and Regulation on Intangible Assets 3. The regulation regarding a maximum time period of amortisation of ten years in practice often neglected by Swedish companies. 36 Nilsson. RR. som eljest gäller för avskrivning av goodwill enligt de och 36 avskrivningen belasta koncernens rörelseresultat.1 A Regulation. In 1991 Redovisningsrådet. Simultaneously. (“ avskrivas grunder.1.1. that otherwise are applicable for amortisation of goodwill. At way the time the possibility to amortise goodwill over a time period longer than same ten was stopped. The amortisation period was limited to ten years with a possibility of extension to an absolute maximum of twenty years. p 5-6 31 . Retrospect of Swedish The first explicit regulation of how to account for goodwill appeared in the Companies Act of 1944 (1944 års Aktiebolagslag). 1998. FAR (Swedish of Authorised Public Acountants) recommended that a goodwill Institute value recorded in the consolidated balance sheet should be amortised according to common grounds.

37 FARs Samlingsvolym 2001 32 . 5 described 37 The Swedish Accounting Regulations for goodwill are set in compliance with The Swedish standard setter IASB. chapter 4 deals with rules concerning amortisation of fixed The amortisation period for fixed assets is stated to be five years. the maximum period for amortisation of goodwill is twenty years. chapter 4 in ÅRL deals with rules concerning write-down of fixed including goodwill. allows an extension of that time only in extraordinary cases.00 will be adopted in Sweden and applicable to financial years starting from 1 January 2002 . It is stated that a write-down is allowed when assets the diminuition of value is established to be permanent. Chapter 7 deals with regulations concerning group accounts. A renewal of Standard RR 1. a longer amortisation period is allowed when economic life is indicated and made probable to be more than five years. Redovisningsråde (The Swedish is Financial Accounting Standards Council) (RR).7. but assets. Section 4. Section 22.1.2 The Current Legal Situation in Sweden. Årsredovisningslagen (1995:1554) (ÅRL) In accordance with chapter 4.Rules and Regulation on Intangible Assets 3. IAS 22. tDuring 1999 Redovisningsrådet (The Swedish Financial Accounting standards Council) started working on a renewal of the paragraph RR 1:96. According to RR 1: 96 the rule about the maximum depreciation period for goodwill was 20 main years. section 2 of Årsredovisningslagen (The Accounting Act) purchased goodwill may be accounted for as an intangible asset. dealing with consolidation principles. Section 5. Chapter out the treatment of purchased goodwill and refers to the sections 7 points of chapter above. According to the regulations in force limit in Sweden today. The model for the Swedish regulations. One of the topics concerned the amortisation period of goodwill.

Rules and Regulation on Intangible Assets One main difference between RR1:96 and RR1.00 is that the reversed recommendation comments on intangible assets in wide and not only on trade as in RR 1:96. 38 marks According to the new recommendation from Redovisningsrådet the maximum period is 20 years. Provided that the time of use can be shown to amortisation be longer than 20 years there is a possibility in exceptional cases for a lengthening of the amortisation period. In cases where the goodwill item is clearly connected to an identifiable asset or group of assets with a time of use exceeding twenty may be reasonable to suppose that it will provide for financial benefits years it to acquirer for a time period longer than twenty years. However, there are the no examples of this given in the recommendation. The amortisation period for goodwill must be considered to have a large impact on the net profit / loss on a yearly basis for many companies. A maximum amortisation period of twenty or years, which so far is possible for example in the United States, forty can dramatically influence the level of a company’s net profit. According to RR 17, Write-downs, an asset should be written down when the recovery value (sw: återvinningsvärde) is below the book value. Recovery value to the highest of the net realisable value and value of use refers (sw: nyttjandevärde). This recommendation is also applicable to intangible assets.


Rundfelt, 2000, p 123


Rules and Regulation on Intangible Assets

3.2 Accounting Concepts
As well as laws and regulation, accounting is ruled by some concepts which are legislated but subject to personal translation by the users. This translation is regulated amongst the accountants around the world through their trade committees . 3.2.1 True and Fair View The concept of true and fair view has its origin in the Anglo-Saxon tradition. It provides companies an option to interpret or relinquish laws and recommendations that are considered to be too formal and old-fashioned. The purpose with this principle is to keep accounting theory up-tomain date. The True and Fair View was introduced in Sweden through the Swedish Annual Accounts Act which was enforced in 1996. According to this, the companies a true and fair view of its financial health and its yearly shall give earnings. Swedish policymakers have accepted the true and fair view as they continuously to the standards of the European Union. In the EU fourth work to adapt company amendment, this principle is accepted and decided upon. The prudence principle, which sometimes can be in conflict with the true and fair is an integrated part in Swedish regulation. This concept sometimes view, brings extensive supplements which can be included in the Annual Report. The practice is that Swedish policy makers interpret the ”true and fair view” as meaning compliance with existing 39 laws.


Dahlin, 1998, p 162


Rules and Regulation on Intangible Assets 3.2.2 The Prudence Concept
40 as the concept of making provision This concept can shortly be explained and probable liabilities only for all actual including assets as incoming resourcesthey when are definitely

realisable. Revenue and profits are not anticipated but are recognised by inclusion in the and loss account only when realised in the form of cash or other profit assets cash realisation can be expressed with reasonable certainty. Provision where is made for all known liabilities (expenses and losses) whether the amount is known with reasonable certainty or is a best estimate in the light of the information available.

3.3 Intangible Assets
3.3.1 Identification Intangibles of

In order to identify and describe the specific nature of an intangible asset, it may be helpful to understand what an intangible asset is not. The distinction between asset and an intangible may clarify what an intangible asset is. a tangible The essential difference between tangible and intangible assets are


1. The value of a tangible asset is created by its tangible nature. value of an intangible asset is created by its intangible 2. The nature. The visual and corporeal elements of a tangible asset give it its value together flows from its physical features. This means that a tangible asset with the should have physical existence and substantial form, it should be capable of being seen touched. A tangible asset should be perceptible to the and touch.

40 41 , 2001-10-12 Reilly and Schweihs, 1999, p 383


patents forth. high life. However. diskettes. 3. 36 the attributes positive of . equipment and monetary assets necessary to commercialise intangible assets like goodwill. An important assets such point discussion about the nature of intangible assets is that intangible in the assets an individual value separate and distinct from tangible have assets. it is of great importance to note that intangible assets and so do represent a value of their own. competitive profitability. Through the combination of tangible assets and intangible assets. These evidence of the existence of an intangible asset may of the for example be in the form of documentation.2 Coexistence Tangible/Intangible between The relationship between tangible and intangible assets is not seldom rather There is often the requirement of tangible assets in order to tight. The owner of an intangible asset can realise the value of the intangible asset by using tangible assets without actually owing the tangible assets. files. These tangible proofs prove the existence of the intangible asset and is of great importance for the creation of the value of the intangible asset. 2. the owner of the tangible asset has a possibility to create a value of new intangible as customer relations. Without without the tangible manifestation. One illustration of this is the need realise the of computer hardware (tangible asset) for exploiting software (intangible asset) in an effective computer way. The value of an intangible asset can be visualised in parts: arises from the property rights linked to the ownership of the 1.3. great market share. forms and agreements. completelyvalue of an intangible asset. intangible asset.Rules and Regulation on Intangible Assets One of the conditions for the existence of an intangible asset is a tangible proof intangible. and a long edge. brand value and goodwill. the value originates from intangible factors such as rarity. The owner of an intangible asset does not necessarily have to own the tangible asset that is used to exploit the value of a specific intangible. trademarks. Often tangible assets are like machinery. the existence of the intangible asset is not proven.

The purpose of this is for general asset identification and classification. The Annual Report is a package of statements presented in narrative form.4. to state ground for taxation and so on. as as numerical. The categorisation is often done into groups of intangible assets with similar valuation methods. while another analyst prefers to refer to the group comprehending human capital-related intangible assets. This is to enhance the comparability of the report. showing numbers from January to December (another.4 The Annual Report 3. going-concern It is worth noticing that one individual intangible asset can be included into more one category depending on the views of the specific analyst. 3. It is worth that the classification of different intangible assets does not affect noticing the answers to crucial questions like: What is the value of a specific intangible asset? is the expected remaining useful life? These questions must be What considered closely connected to our research work about the valuation of goodwill in the ITbusiness. so called split financial year exist. personal goodwill of a professional and general business value. in content. to make it easier for the readers and the analysts. One than analyst example classify the employment agreement of an executive as may for a contract-related intangible asset. professional practice goodwill.Rules and Regulation on Intangible Assets 3. and is used among some companies).4 Common Categories of Intangible Assets Individual intangible assets are generally categorised by economists and appraisers into distinct groups. Goodwill-related intangible describe one category including for example institutional assets can goodwill. It tells shareholders and other interested well parties 37 .3.1 The Company Annual Report The Annual Report has a long history. The present way to produce the report is annually.

4. The three main accounting statements are the balance sheet (presenting the year-end position of the company). 3. the profit and loss account if the company has been successful or not in the sence of (showing creating the shareholders). comparing. or since the last report was presented. This was discussed in the two reports that we will view shortly below: The Trueblood Report was issued in the USA in 1973. financial statements is to supply information (2) An objective of useful to investors and creditors for predicting. and so our accounting tradition is a mix many of them. The Trueblood Report was on the objectives of financial statements and identified many such objectives. and evaluating 38 .Rules and Regulation on Intangible Assets what has been happening during the last 12 months.4. It reader. 3. banks. auditors and other parties. The legitimacy of a financial report is that it is bound to follow rules and regulations in. The world is in a harmonization process concerning accounting. Some key ones are quoted below: ” (1) The basic objective of financial statements is to provide information useful for making economic decisions. The Annual Report is form bound through and through practice. Most companies include in the ”package” a legislation free presentation of the company and its goals etc. is important to know this when reading financial reports critically. and the cash flow statement (showing the flow wealth for of liquidity position for the year).2 Purpose of Accounts Around the world.2 Information aimed at certain readers The information given from different companies are often aimed at a certain It may be investors. shareholders. different rules have had different purposes. In Sweden an additional director´s report the is compulsory (förvaltningsberättelsen). and Sweden have had influences from all parts of the world.

42 The Trueblood Report.Rules and Regulation on Intangible Assets potential cash flows to them in terms of amount. The basic approach of the document was that ”corporate reports shoud seek to satisfy the information needs of users. 1973 39 . also different views on facts in some They have cases. (3) An objective of financial statements is to supply information useful in judging management´s ability to utilize enterprise resources in achieving the primary enterprise goal. This was a discussion paper published by was ”The the Accounting Standards Steering Committee in 1975. timing and related uncertainty . 42 effectively ” A similar document published at about the same time in the United Kingdom Corporate report”. These seven user groups were: (1) the equity investor group the loan creditor (2) group the employee (3) group the analyst-adviser (4) group the business contact (5) group the governmental (6) sphere the public (7) sector The different groups have some equal and some different needs of information.

Rules and Regulation on Intangible Assets 40 .

and present chosen parts from the debate around goodwill. On the one the present view of the standard maker might prevail. The subject is a matter of great current concern and is creating an increasing tension between the standard makers and those who prepare and use 43 accounts” ”The basic position of traditional accounting is that intangible assets have a value which appears out of the blue and is equally likely to disappear in the same The combination of a lack of transactional evidence for the existence way. 44 Such a tension must eventually lead to a resolution of some kind. 41 . In the virtual real commercial world. business and investment world will see traditional company reports as being increasingly their decision-makin processes. the irrelevant to business prevail and some method will be found to report the etheral as well view will as corporation dimension of the business´s position.a Part of ”the New Economy” In this fourth chapter we present definitions of.Goodwill – Economy” a Part of “the New 4. No such solution is the likely 43 44 Brockington. If so the hand. On the other hand. Goodwill . those managing large companies find that the name of their product and the reputation of their business in the market are very substantial. To them it seems as if these assets represent such a major part of the position of the business that it is impossible to justify their omission from statements purporting to show that position” . 1996. The debate also concerns the new ways to conduct in ”the new economy” which is why we also present the idea of business this concept. factors in their ability to earn profits. of intangibles and the volatile nature of their valuation leads this tradition most to a total exclusion of such assets from the accounting records. often dominant. p 5 Ibid. ”If the science of accounting has a final frontier then perhaps accounting for intangible assets lies on it.

but I know it when I see it. accounting interpretations and economics interpretations. less the fair market value of the business real property and tangible personal tangible property. which in an acquisition transaction is represented by the actual purchase price for the business. The different interpretations of goodwill may be divided into two main groups. 1999 42 . the business enterprise.Goodwill – Economy” a Part of “the New to be fully satisfactory unless it meets the legitimate concerns represented by both points of 45 view. To the the value of goodwill often represents the total value of accountants. Supreme Court Justice William J Brenner may be used when it comes to defining what goodwill really is. The definition of what goodwill is differs from analyst to analyst and therefore no universally accepted definition of there is goodwill.” 4.1. 1996 Reilly and Schweihs. Purchased goodwill is recorded by the statements corporateafter the acquisition of a business. Interpretations of Goodwill “ I can’t define it. Goodwill that a business enterprise develops is seldom recorded on the financial of the business. Both namely groups generally agree on the factors that create goodwill and the types of situations goodwill when arises.” 46 The quotation above said by U. 45 46 Brockington. This is only the case when acquirer the acquisition qualifies under the purchase accounting rules (compared to the pooling of interest accounting rules). The identification and quantification of goodwill intangibles are important issues valuation of a business when using an asset-based valuation of any approach.S.

p 383 Ibid.2 Components of Goodwill Three principal components of goodwill can be recognised. The component products of expectations is directly connected to the concept of goodwill. The components canconsidered as the aspects that cause goodwill or the rationale behind be the existence of goodwill in certain situations: 1. 2. The expectations of future events that are not directly related to the activities in the business in the current situation. A well functioning organisation of the elements create value and some of that value can generate a goodwill intangible. employees and management.Going-Concern Value Element of Goodwill: This component includes the existence of assets in place and ready to use. of the business. 43 . future or services. tangible or intangible. situations of evaluation of goodwill concepts from both the In most accountants 47 and the economists point of view are included. Examples of this component are the expectations from investors regarding future mergers and acquisitions. which here may the current value of future assets that are not yet in existence on the day reflect of 47 48 Reilly and Schweihs.1. Elements referred to are capital. 4.Goodwill – Economy” a Part of “the New Economist on the other hand define the intangible asset goodwill as s the capitalisation of all of the economic income from a business enterprise that cannot be associated with any other asset. Subsistence of a surplus of economic income. Value is created through the fact that all elements of a business enterprise are physically and functionally assembled. future clients or customers and so forth. 1999.” 3. “The excess economic relates directly to the concept of goodwill as the value of a component business economic unit) that cannot be assigned to any of the other (or other tangibleor identified intangible assets of the 48 assets business. equipment.

for candivided into the practitioner component and the business component. 49 ” 4.1. 1999. 4. the longevity. page 382 44 .business component on the other hand can be illustrated by goodwill The created reputation.1999 Ibid. The professional practice goodwill practice. It categories on different circumstances in which the goodwill comes depending into existence should not have an influence on the valuation of goodwill. Institutional goodwill relates to the goodwill of an industrial or commercial business enterprise.Goodwill – Economy” a Part of “the New valuation. The goodwill is in this case considered to be a result from collective operations of the the enterprise. Least commonly used are the cost methods approach methods. for example a lawyer or a CPA.. while market approach are not used that frequent.3 Different Goodwill Sets of Different sets of circumstances may have an impact on the identification and the ownership of goodwill. 1. 2. assembled assets and so forth of the by the institutional is important to notice that the identification into different practice.1. which relates to goodwill in a professional example in consulting firms. market approach and income approach are all relevant methods for valuation and economic analysing of goodwill intangibles. 49 50 Reilly and Schweihs. The be first component is the goodwill created by the skills and the name of the individual human professional in the specific business area. The most commonly used are the income approach methods. “Investors (and owners) assign a goodwill value to a business if they net present value of the income associated with the future events to expect be positive.4 Valuation Goodwill Methods for 50 Cost approach. Professional practice goodwill.

Reilly and Schweihs. product lines and so forth. The capitalised excess economic income method involves the quantification and capitalisation of any excess economic income earned.Goodwill – Economy” a Part of “the New Three regularly used income approach methods are: 1. This method method is founded on the condition of the fact that the value of the business enterprise is present value of the future economic income to be derived by the the stakeholders of the 51 business.. Another often used within the first group is the discounted cash flow method. To form a complete analysis of future economic events must be considered to be a very complicated assignment. Estimations of regular of industry average rates of return on investments are often used in connection to this method. More than one method regarding valuation of going concern business entities are often used to develop supporting confirmation to the valuation concluded. p 388 Ibid. 3. Present value of future economic events method. This is considered to be one of the most correct methods to value method a company’s goodwill but is also looked upon as difficult to use since the uncertainty of long-term economic events is a factor of great impact. Capitalised excess economic income method. The residual from business enterprise value method values goodwill in the following way: Overall business enterprise value less the value of financial the value of tangible assets and less the value of identified assets less intangible assets. p 391 52 51 52 45 . acquisitions. 2. equals the intangible value in the nature of goodwill. Residual from business enterprise value method. The technique is based on the estimation of an amount or normal income that can be expected from investors. Present value of future economic events method involves estimations of expected future mergers. 1999.

people. speed. The journalist who wrote this meant that all of the flows of the business can be identified with specific assets or groups cash of assets. 1998.Goodwill – Economy” a Part of “the New It is important to notice that all three methods are founded on the perception of goodwill representing the potential of economic benefit in the future.5 Self-Generated Goodwill Goodwill / Purchased It is important to distinguish between selfgenerated and purchased goodwill. 4. Everything is becoming electronically connected to everything else: products. Speed can be explained as: “Every aspect of business and the connected organisation operates and changes real 54 Connectivity can be described in the following way: “ in time”. C.2 The New Economy – How Old Is New? When describing the essence of the new economy.6 Goodwill Discussion –Great Subject to Goodwill has been/is an important issue in the context of any discussion on intangible assets. 1996. connectivity and the growth of intangible value are three central themes. 53 54 Brockington. although taken in consideration in alternative reports the such as valuing the market price / share price. Those that could not be allocated could be explained by the existense of goodwill which in this sense derives from the synergy that is achieved when a particular company´s assets are operated together by a particular management in a particular 53 situation.1. p 119 Davis and Meyer. only the latter that can be accounted for in traditional reports. As early as 1929 the Economist described goodwill as a ”master valuation account”. 4. since it is The economy discusses this frequently since in-house brands are not valued ”new” on financial reports.1. p 5 46 . 4.

New refers to something different from what has only for been something that is not yet explored. Strannegård and Friberg. The high in the new economy implies new actors to take part of what is new. who may have (had) a label of 55 56 57 Davis and Meyer. when it gets the that will change the world 57 push. countries. The global flow of capital links information technology. The new economy and the internet companies have attracted a vast interest from mass media. p 30 47 . which are things hard to see be traced and measure. new new thing” is a context created by “The entrepreneur Jim Clark. pictures. who started ITNetscape and Silicon Graphics. in business life. To get involved in what is new has before. and of course capital. speed The uniqueness of what is new then gets harder to call attention to and “new” transforms into “old”. intangible is growing 56 The increasing value of intangibles can The faster.”to information and relationships. “.Goodwill – Economy” a Part of “the New 55 In this connection one clarification companies. new It’s idea that is a tiny push away from general acceptance and. together creating new traditions information.”is: “ Every offer has both of intangibles tangible and intangible economic value. the public. Internet must be considered to be the most dominant technology in the new economy. Networkinformation age and the new economy are all concepts describing a society. new unbounded world where there seems to be a constant flow of knowledge. C. for a long time been regarded as a condition for success in business life. shareholders and business men. 2001. A highly technological society characterised by way speed and flexibility was the arena for the entrepreneur. 1998. The internet companies created new hopes for the future with help from the business new technology and the new kind of enterprises were made into symbols for a new of doing business. p 5 Ibid. The concept “new” is connected with something that has existed or been known a short time. “ The new thing is a notion that is poised to be taken seriously in the marketplace. sounds. and symbols. everything. New traditions and new social principals are created.

20 % of the employees acid in 59 This “Quickcompany” lost their jobs over a period of five months. a period of tests for many companies in this line of business. The average age do not of employees in the internet business has so far been low in comparison with more 60 about the study mentioned above. 48 . Companies acting in the network society are often organised in a rather nonhierarchic way. pp 51-52. Ibid. which the modern world is organised. perhaps also because of the lack of time. 2001 Ibid. the fall was very steep for most internet companies. He means that every innovation that brings about an acceleration of speed also will create a corresponding crash. the internet world. When later the expectations when the from stakeholders could not be met. claims that acceleration is the fundamental principal around Paul Virilio. The working name of that company in the study was “Quickcompany” – a term which describes one of the characteristics in this line business. where “quick” and “action” are keywords.Goodwill – Economy” a Part of “the New heroism in the new economy. traditional business lines. dramatic development was typical for Swedish Internet companies during the period of time mentioned. A French of philosopher. In the book that the average age of the employees was 29 years. The study aimed to focus on how the new technologies have an impact on the society and on the way people work and live. The internet companies were highly respected public faith in them was strong. the majority was noted had worked in the company for less than one year and the average time of 58 59 60 Strannegård and Friberg. To describe the study was made from the inside of a Swedish company in the sector. The organisations change so fast that organisational charts often exist. 58 About two and a half years ago a study was started at “ Centre for Advanced Leadership” at Handelshögskolan in Stockholm with the Studies in title “Ledarskap och organisering i Internetföretag”(Leadership and organisation in Internet companies). “Quickcompany” lost 90 % of its stock value between spring 1999 and autumn 2000.

of capital have become of great importance when evaluating New forms a company. Evaluation and pricing more of companies started to connect rather to the income that may be generated than to net worth according to the balance sheet. Davis and Meyer. p 84. In the last years intellectual. 61 61 62 Strannegård & Friberg. Knowledge has been described as the most important factor of input and in the modern economy.Goodwill – Economy” employment months. The income statement grew in importance as rather an indicator of the value of an enterprise showing the flow of activity and transactions over a period of time. The interest in future prospects the are of a larger interest to analysts than the current performance of a often company and investors search for promises of These facts have been growth. The prices are yielding market capitalisation that for many firms share far exceed their book 62 values. where the evaluations of firms are reflected in most apparent their prices. Production is more and more immaterial result and knowledge-intense companies are focused on research about the new society. Capital in the traditional sense often refers to plants and production equipment. 2001. compared to the balance sheet showing the balances of a specific date. was six a Part of “the New Another characteristic of the new economy is the important role knowledge plays. on Wall Street. During the last decades business people have started to focus on flow and changethan on stock and stasis. Future accumulation of value can be considered to be closely related to income than to assets. p185-186 49 . human and structural capital have been in focus. 1998.

Goodwill – Economy” a Part of “the New 50 .

producers such as IBM. 63 www.The Sector Internet 5. A large part of schools the population can therefore use this the new technology language. During media the 1990´s the companies that had this computer science knowhow were called Internet companies. from IT – Information Technology. and secondly we look at data the companies within this industry chosen from the Affärsvärldens from index. and followers Compaq have established on the market. such as telephones (Ericsson) and the swedish steel industry. The Internet Sector Starting with chapter 5. This new brought a new kind of work. so called software producers started to evolve. It is not easy to explain why Sweden (and Finland) have positioned in the front borders among large countries such as the USA. the companies that made programs for been the hardware. the computer science trade. As the computers became household appliances. we present our empirical findings. In this chapter. we first look at the industry of IT. Apple.1 Brief History of the Sector Although the Internet´s history started in the 1950´s as a military strategy it came into worldwide use in the 1970´s when the universities weapon. Microsoft and Adobe and in Sweden we have 2001-07-20 51 . SPCS and other. got permission to use parts of it. 63 5. or IT companies. Sweden has a long tradition as a leading force branches in technological branches. This will continue chapter 6 by looking more closely into specific through companies. and others have seen skyrocketing sales figures. From the 1980´s it has grown rapidly. are some. themselves Swedishstarted early with language lessons in English. Also. As English has been established as the major computer science and IT language the borders have not been any problems for computer companies to establish around the world.

As the market fell in the end of the 1990´s. This cost can be amortised against earnings or financed by stock emissions. and the internet consultant companies evolved from this. the IT consultants found themselves amortisation costs and low earnings at the same time when with great financers ran to traditional sectors. were simply 5. the intangible asset´s account grow. The earnings plan was not realised as fast as expected. As the market for software and hardware grew. This is one reason gain why Swedish IT-companies have acquired each other and have been rapidly introduced around the world. it is a fact that Swedish companies have taken an impressive part in the IT-technology sector. such as the IT-consultant market. changesvariety of of which some of the most important are: • a new basis technology – IT • new deregulated global markets • immaterial values grow in importance ways of organising • new companies economic policies and low • new inflation attitudes and values among people • new globally 52 . As companies grow through acquisitions. one strategy is to great market shares and with this control the market. The New Economy is a combination of a protocol) .2 Why has IT / ” the New Economy” Grown So Fast? Information technology is today linked with WAP (wireless application broadband and so on. many saw the forecoming need of adapting the traditional industry to the new technology.The Sector Internet Either way. When new markets occur. plans Many overstated.

page 17 As can be seen above. Hårda data om den nya ekonomin. It may then be interesting to look at IT53 . from bankers and rich people to ordinary employees through funds. a break in the trend appears in the 1990s.3 A Swedish Outlook on the IT Sector The development of GNP and inflation rate in Sweden are visualised below: Annual GNP and Inflation rates in Sweden in % 14 12 10 8 6 4 2 0 19 70 19 76 198 2 1988 1 994 20 00 -2 -4 i nfl at ion GN P Source: Den nya ekonomin. But it is probably one influential sector during these years. the opposite has a fact since 1993. While the inflation rate historically has been higher than the GNP growth. Also.The Sector Internet The changes discussed above are some of the reasons for the speed with which this ”new economy” have grown. when many mutual ITcompanies suffer from badwill and bad earnings and stockprices fall. The last few basis years skyrocketing stock prices have laid ground for investment interest among all groups in a society. Sweden has evolved from a stagnating economy been with inflationary problems to an economy with growth and in comparison with European countries. This picture have changed during year 2001. Today the companies have to fight hard for the investors new capital. rather low inflation. investors are acting on a more globaland this is ”creating” more capital for this new industry. It is not statistically proved that growth have been steered by IT-investments or by any specific factor. 5.

6 . is difficult to distinguish in a national focus.2 . 08 0.The Sector Internet investments and the growth of TFP (Total Factor Production) to see if any relation can be seen between these two. The above chart visualizes that a connection between the two factors can be seen.4 0. 04 0. 06 0.4 .8 0.i nvest m ent s D en mar k N orw ay S pa in S we den U SA A ust ria G e rman y I re la nd J apa n I t al y B elg iu m N et h erla nd s F ra nce Source: OECD Note: TFP refer to the change between median of 1980-90 and median between 1995-98. We will try to look at various themes: its • size • its investments • development of companiesdemands at the labour • new market deregulated.0. It is rooted in the society on many levels. A study from the Näringsdepartementet (Minstry of Industry. the new economy.0.0. IT investments are taken from expenditures from ICT . 1 I T.0.2 0 . IT-investments and development of TFP (total factor production) F i nla nd 0. The IT sector or. Employment and Communications) in Sweden concludes that one third of the growth of the trade industry can be connected to the IT and industry. global financial • a market Size 54 .6 0.8 -1 0 0. 02 0.

The Sector Internet The most used definition of the IT-sector is the producers of computers and mobile telecom. The IT industry´s share of GNP is showed in the chart below. the and 5% of the employment in Sweden in 64 . IT sectors share of GNP in % 8 6 4 2 1993 1994 1995 1996 1997 1998 Source: Näringsdepartementet The importance of the IT sector is shown even more by the fact that it stands for of the growth of the GNP in Sweden between 1993-1999. With this definition the IT sector stood for 7% of consulting. the software. as well as the service companies doing the support. 2001-11-10 55 . sales and so on. This sector is larger GNP 1996 than in many other countries. as 25% indicated below: Sw e di sh IT se c to r´ s gr ow th c ompa r e d wi th to ta l t ra de a nd i nd us tr y 30 25 20 15 10 5 0 19 9 4 1 99 5 1 9 96 1 9 9 7 19 9 8 1 9 99 Source: Näringsdepartementet 2000 Investment s 64 Näringsdepartementet.

New Demands on the Labour Market In this new sector. the IT investments share of total investments can make the picture even more clear: Share of IT investments of total investments in Sweden 25 20 15 10 5 0 1 99 3 19 94 19 9 5 1 99 6 19 97 1 99 8 Source: SCB nationalräkenskaperna. In 1999 it had grown to almost 25. A Deregulated Market Global Financial 56 . the demand for well-educated staff have grown. Employees have been other more movable in this sector. why efforts to keep them are made.000 companies in the sector.The Sector Internet Also. They are not easy to replace since almost no unemployment was to be found in the sector ´s workforce. Development Companies of The number of companies in the IT-sector has grown rapidly. bonuses and are not frequent in many other sectors. In 1993 Sweden had approximately 13. Mainly the growth was in database hosts and ”other” IT companies but also the system and program consultants have grown in numbers. which is not the case today. Also the way of keeping high performing personnel with option programmes.000.

The Sector Internet A higher demand for a well working financial operation. countries with large stock markets have generally higher IT investments. 2000 During 2000-2001 the above graph has plummeted. Another indicator is the increasing foreign capital that was invested in Swedish ITcompanies: Foreign ownership on OM. but a major fall is been expected. The new sector has looking for investors and a growing numbers of introductions on the been stock have taken place. Stockholm Stock Exchange 40 35 30 25 20 15 10 5 0 Year Source: Hårda data om den nya ekonomin. 57 . The IT companies share of new capital through new introductions to OM Stockholmsbörsen have increased during the last years and measured up to 45% in 1999. The connection between a well organized market and functioning stock market and investments in the IT sector has been strong. This is seen as one indicator pointing to the fact that the economy is changing. The foreign ownership in the industry has not yet seen in measures. The investors are running to traditional industries because of the falling stock prices and bad reports from the companies in the IT industry. In general.

4. 27 finska regler ) 28 Turnit B (20)WM-data B (0 to 29 20) (3 to 10) Alfaskop 3 (*)Cell Network (10 to 5 20) 6 Cyber Com (more than 5) 7 (5 Dimension ) 8 Enea (10) 9 Framfab (10)Frontec B (10 to 10 20 ) 11 HIQ (5 and 10) 12 Icon (3 to 5) IMS Data 13 (10)Kipling 14 (10 to 20) Know 15 It (10)Mind 16 (5 to 10) Modul 1 17 (5 to 10) Mogul.4 An Overview of the Selected Companies from Index from Affärsvärlden 5. The amortisation period of goodwill is presented in parenthesis. 10) 21Proact (5 to 10) Pronyx 22 (5 to 10) Resco B 23 20) RKS B 24 20) Softronic 25 20) (10 to (10 to (5 to 58 .1 Periods Amortisation The companies in our study are listed below. Adcore 20) 2 Adera B (526 Teleca B/sigma (5 to 20) Tietoenator (3-20.The Sector Internet (3 to 18 5) 19. The data is collected from their Annual Reports: 1. MSC B (5) Novotek B (5 to 20.

4. 59 . firstly years. 12 presented a new CEO in the Annual Report. They act on the same market.The Sector Internet *Alfaskop filed for bancruptcy during the fall of 2001.3 The Past Year – One Page Summary in the Annual Reports In the Annual Report most companies show the year that passed in a summary. secondly 10 to 20. Most common is if the company changed CEO (Chief Executive Officer).4. Many companies changed board members during the year We will firstly discuss three groups of chosen the amortisation 0 to 10. telling mostly the good news. One question that may be asked is why the amortisation periods differ among the companies. 5. most companies in our research present ”good numbers” On this (meaning. Of the presented 29 companies in our research.2 Chart Showing Chosen Amortisation Periods of Goodwill: Distribution among the companies . They will not be analyzed this in report. and finally more than 20 periods. leaving out the other kind). seek the same customers and deals and market is free.chosen amortisation periods of goodwill 9% 43% up to 5 years up to 10 years up to 20 years 48% 5.

From the researched companies. or overall success on a certain product. It may seem rather unorthodox to chose to exclude in the the goodwill in one ratio.The Sector Internet New contracts are noted. meant investors and to start the search for capital needed to survive. or if a certain success have taken place in some of the branches. sales of branches or acquisitions (which increases the post) are same shown information. Also. Those that do not present key ratios example Cell Network which have great problems with showing are for “good” They argue that their ”work” will pay off soon. key ratios are presented. No losses are discussed. 5. presenting new increases on the goodwill item. 13% 19% 0 to 25 2 5% 26 to 5 0 51t o75 76 to 1 43% Source: Annual Reports from 2000 65 Annual Reports 2000 60 . At to calm the time.4 Earnings Companies among the 65 Among the 29 companies only 13 (44. present key all ratios without regarding the goodwill posts. This is probably numbers.8%) show black figures from operations Among studied companies that show losses from operations (before financial and expenses) the goodwill item is distributed income accordingly: Goodwill compared to Equity among companies with negative operative earnings in percentage . as is the case.4.

50 -1. This gives waya very heated debate on whether goodwill should be written off to immediately that its value is questionnable (mentioned in chapter 3) when it seems like planned implementations on regulation on goodwill in the USA.00 -0. It looked ahead and during did save for the downfall that the new millenium brought. to the In the industry analysed. the year 2000 was a very odd year.50 Source: Annual Reports 2000 *The earnings / turnover represent the companies presented in the beginning of chapter. 61 .00 -2. analysts. It could simply not not be in any horizon (said IT-people. the goodwill a heavy burden. negative.50 Turnover Year 0. or as here. in that order from Adcore at the extreme left to VM-data at this the furthest right.00 -1. creditors and seen other).The Sector Internet Among companies where earnings are low.50 -2. This means that neither the acquired companies or items are the parent company are earning any means for handling the present. For most years the 1990s the industry had very good earnings. We would likemake some more comparisons on the companies that suffer from to negative earnings : Earnings / 2000 0.

41 Source: Annual Reports from 2000 Most companies have.03 0. Note that the major part of the organic studied companies has close to a 50 percentage of the owner´s equity in goodwill. Discussion is presented shortly in the end of this about this chapter.31 51to75 76 to 1 over 1 0. They use Finnish Accounting rules and when Tieto and Enator merged. and therefore the goodwill post became zero from this merger.grouping. The is divided into groups of 0-25% and so data on. the acquisition method used. Noteworthy is that TietoEnator is among those below 25%. Should we the of the material would be that 66% would fit into this group. got large goodwill items. Goodwill / Equity 0. look at the companies that have between a 35 to a 65 percentage.07 0. during the years with the trend towards acquisition before growth. 62 . Their goodwill is larger than the owner´s equity and this is a warning signal for certain. Turnit is share the company that has a group of its own at the “over 1”.The Sector Looking at companies: goodwill and equity Internet among all Below chart shows the ratio between goodwill and equity.17 0 to 25 26 to 50 0. This is interesting when knowing that the equity is the item paying for goodwill write-downs. was not The pooling of interest method could not have been used in Sweden.

and also how the acquisitions have been financed. 5. when also keeping the former in mind. At the same time. meaning it nothing to do with operations. of the Of course. many companies are in need of capital to the survive. Besides the fact that writedown of goodwill hits the equity. In the year 2000 a company could fill up with new capital lowers by issuing new stock. or fear of them. but in 2001 the market is cold when it comes to investing in sector.5. The goodwill item will eventually have to has be 63 . even for a short period of times time. but it shows that the equity is vulnerable to goodwill write-downs. equally it also the profit. which might create hard when liquidity is low.The Sector Internet Looking at Goodwill in relation with Total Capital Employed : Goodwill / Total Capital Employed 7% 10% 0 to 25 49% 26 to 50 51to75 76 to 1 34% Source: Annual Reports from 2000 With the above chart one sees. the share goodwill item. the share of goodwill is less when looking at total capital employed. General Impression of the Studied Annual Reports The numbers presented in the Annual Reports are as seen above not very optimistic. Many companies show numbers excluding goodwill items. It is a fact that if goodwill write-downs. take a large part of the equity.4. the banks and other creditors will not be very open to new funds.

use different amortisation periods.The Sector Internet amortised in full. Not all go along with Swedish rules. 64 . also. and selling them for almost nothing.4. We have looked upon information concerning how companies handle their goodwill. An immediate write-down will break most of the companies. Also. Many companies disclose that they amortise goodwill in 10 to 20 years. as seen in has had the earlier chapters have stated. the acquisitions are mainly the intangible assets their that amortised for the most extended time are periods. if it resides in Sweden. and in these cases they often US standards because the USA have the most lenient rules on this follow issue. This information is found in the Annual Report. Since they are based in Sweden. Very few companies have searched for organic growth before growth through acquisitions. wireless world. money searching for size. Sweden a rather cautious approach to the amortisation of goodwill. will change.6 Regulation Used Swedish companies act in a global. is the question. It is clear. recommendations should guide them. have not been a good deal for the industry. only Swedish rules apply. also as stated in earlier This chapter. Regulators are planning different ways to handle goodwill. but we have chosen the year that represents the bulk of goodwill item. Many. How they have handled the goodwill issue in this context. It is legislated in Companies the RR´s Act (ABL) how to act when global. Buying expensive IT companies. since they have neither nor great profits to pay for it. The goodwill items descend from acquisitions not only within Sweden. mainly 5.

The Sector


5.5 Key Ratios – How Can the Company Use them in Order to Show the ”Right” Numbers?
In terms of accounting, goodwill is normally looked upon as an investment like investments in the sense that it represents an expenditure that probably other will the company future income. This is the case no matter whether bring the purchased goodwill is paid for in cash or with own shares. The future earnings are supposed to arise from the subsidiary that was bought and/or from synergies to Swedish regulations goodwill has a limited economic life According and should therefor be subject to straight-line amortisation over the time period representing its economic life, not longer than 20 years. (In exceptional casestime limit can be extended according to new regulatory work; see this Chapter 3). Financial analysts sometimes ignore goodwill and amortisation of goodwill. This approach is justified by the fact that it is the task for every financial analyst to evaluate the total value of goodwill in the entire business group at every point of with reference to forecasts made concerning the expected future earnings time of group. Evaluations that are based on future cash flows are not influenced the by the treatment of 66 goodwill. The way goodwill is handled in a company’s accounts has of course an impact key ratios. The issues around how goodwill is dealt with are therefore on the in many aspects controversial, not only for the financial analysts but also for top management. The ground for the problems is the valuation of goodwill and how amortised. The effect of amortisation of goodwill on the profit is the it is most important involved. issue to most people


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The Sector


5.5.1 Looking at Key Ratios and Income Measures in Connection to Goodwill When goodwill is eliminated in an analysis the impact mainly occurs when at earnings ratios, which may lead to misleading conclusions. Above looking all key-ratios including shareholder’s equity are effected when goodwill is eliminated . We would like to present some key ratios and income measures that we find important in connection with the discussion about the impact of goodwill on a company’s earnings. Earnings per share and EBITDA. In case of a big acquisition with a large goodwill value involved, the result often the key ratio Earnings per share, decreases, at least temporary. This is that may be considered as an odd effect in cases when the acquisition is regarded as a good investment. One income measure often used nowadays is EBITDA Before Interest Taxes Depreciation and Amortisation of (Earnings goodwill). EBITDA instead of earnings per share the effect of goodwill When using is spirited away. One cannot claim that one of these indicators is more correct thanother, but it is important to be aware of the fact that when using EBITDA, the the effects of acquisitions and the demand for an increasing earning capacity will be neglected. The importance of taking goodwill in consideration is pointed out by Peter Malmqvist, analyst at Aragon Kapitalförvaltning, in an article in Dagens 1999. 68 He means, that when analysing companies that Nyheter continuously grow through acquisitions, it is essential to consider a cost for that growth when presenting a forecast about the company. It is reasonable to assume that this cost be at least equal to the cost for acquisitions historically. Unfortunately this will is fact that is often forgotten by analysts, according to Malmqvist. His approach a is therefore that by yearly amortisation of goodwill negative surprises will be avoided. Another argument in favour of recognising the costs of goodwill is that in cases of large acquisitions risk exposure is more immediate since large acquisitions are harder to carry out than small ones. Problems with getting the

Nachemson-Ekwall , 1999-11-14


The Sector


new organisation to work smoothly and the fact that the positive effects of coordination will be harder to achieve when a large acquisition are important issues to take in account when analysing a company. P/E ratio and PERA P/E ratio (Price Earnings Ratio) or PER is one way to describe the evaluation ofcompany and is one of the most commonly used key-ratios when estimating a a company’s value. The P/E ratio expresses the market value per share divided with earnings per share and is often used for comparisons of companies.comparisons easier between companies where one company has To make grown acquisition and the other organically, PERA or Price Earnings through Ratio adjusted for Amortisation of goodwill, can be used. PERA expresses the market share divided with earnings per share with reversed amortisation value per of goodwill. PERA is not yet very commonly applied in Sweden, but is more frequently adopted in the rest of 69 Europe. As discussed above, analysts work with goodwill in different ways. It is therefor that companies disclose goodwill openly in the balance sheet and in desirable the income statement. Large amounts of goodwill and amortisation of these should accounted for in notes per subsidiary. This procedure makes it easier also be to everyone to evaluate the fairness of the goodwill value and its amortisation. 5.5.2 An Example on Key Ratios in Connection to an Acquisition Accounting with or without goodwill will give different pictures of a company. to visualise one outcome by presenting an example given by We will try the 70 : Finansanalytikernas Förening

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Finansanalytikernas rekommendationer 2001, p 31 Finansanalytikernas rekommendationer 2001, p 93


40 2500 68 .67 5 6. Payment is done with shares in M. 17 25 19 12 17 18 23 19 16 16 58 Non-cash Cash issue acquisi tion Solidity op capital 50 50 32 No of shares.5 6 5. goodwill -30 -30 -30 Profit 440 180 620 -30 590 590 Op. Costs -4960 -1620 -6580 -6580 -6580 Am. millio n Share rate 18 23 19 50 50 30 20 50 50 30 Stock value total 1500 1000 2500 1500 Earnings/share 6.67 10 8.5 P/e 7.3 7.The Sector Internet M acquires all shares in D for 1000 mSEK. Finances -120 -40 -160 -160 -260 bef fin 320 140 460 -30 430 Result 330 -120 -40 -160 -160 -130 Tax Net profit 200 100 300 -30 270 200 Op. Corporation´s´earnings and asset Both reports like look this: M D M+D Adjust m Sales 5400 1800 7200 7200 7200 Op. Capital 2400 800 3200 +600 3800 3800 Net debt 1200 400 1600 1600 2600 Equity 1200 400 1600 +600 2200 1200 Rate of return on equity Rate of return on Capital op. companies and the newly founded.3 9.

The latter figure consists of the parent companys SEK to equity the acquisitions. M owns The purchase is paid with 20 million SEK which increases the corporations (= the group of company M+D) equity with 20 times stock price 50 = 1000 million 2200 mSEK. where cash is used. a loan of 10% interest rate is financing the acquisition. 69 . In the third. 1200 mSEK. We presume that stock prices remain like before the acquisition. No hidden values lie in D´s assets or liabilities and therefore the goodwill value is 600 million SEK (=mSEK). In the first column we present the numbers of both companies. an addition of numbers before consolidationThese additions match the result that would have been if adjustments. In the second.The Sector Equity / share 40 20 32 44 40 Stock price/equity % Internet 125 250 156 114 125 Total value 2700 1400 4100 EV/EVBIT 6. the companies had used the pooling-of-interest method. No-cashissue: before the purchase 30 million shares at a stock price of 50 SEK.1 7. The key ratios that are drawn from them are a weighed average from both companies´ ratios before goodwill and used as basis for the discussion about how goodwill accounting key affects ratios. paying with own shares. the subsidiary´s equity of 400 mSEK. M pays the deal with 20 million shares at a of 50 SEK. before and goodwill of 600 mSEK. In the first.6 6.9 6.9 Op value/ book value % 4100 4100 113 175 128 108 108 D has an equity of 400.8 6.

40 because amortisation of goodwill. The corporations annual amortisation is then 30 mSEK.The Sector Internet The value of the goodwill is also included in the corporation´s working capital + net debt) which means 600 mSEK larger than the sum of (equity both companies. 70 . * The earnings per share decreases from 6 SEK to 5. In this case the purchase is said to be of strategic interest and plan for the a period of 20 years is chosen. Goodwill amortisation is not tax deductible.3. Whether goodwill affects the corporation´s profit depends on the amortisationitem. Since earnings are lower the EV/EVBIT rises net somewhat. The decrease of earnings also increases the P/e ratio from 8. * The solidity on working capital rises from 50% to 58% depending on the fact the goodwill value is financed with own shares that (equity). * The relation between the market value of the corporation and its book value decreases from 128 to 108 percentage because of the goodwill item.3 to 9. The corporation´s key ratios differ from the companies accordingly: * The Rate of Return on equity decreases from 19 to 12 depending on a) the goodwill item increases total equity and b) the amortisation lowers the profit. of the * The corporation´s market price is the sum of both M and D´s market value plus debt. If D had higher or lower profit per share than M this would have affected the profit per share in the new corporation accordingly. * Equity per share rises from 32 to 44 SEK per share because the value of the goodwill item brings the market price (stock price) to a level of 114% instead of 156% equity.

In the last This is financed with a loan with an interest rate of 10%. * Since the corporation´s equity is not affected by the purchase. It becomes 17% compared to 19 in the rd column. The earnings improve compared to the no-cash the case was 12. The working capital is not affected but the net debt increases 30 % with mSEK and the equity is accordingly lowered by 1000 this. These key ratios are then lower than those in column 3. * The earnings ratio on equity is not affected strongly. The corporation´s financial costs increases with 100 mSEK which lowers the net profit with 70 mSEK after tax. These key ratios depend remain on the financing. by 20 million shares.3 to these 7. which * The profit per share is 6. The increased financial costs and the amortisation of goodwill do not add up to more than 5 mSEK if calculated on shares. 71 . In this case it is the same as M´s ratio 3 profit cover just about the goodwill amortisations and the financial cost since D´s of purchase (interest).5. This sums up to that the P/e ratio decreases from 8. When comparing the ratios from the sum of both companies we find (col 3) these differences: * The earning capacity on working capital as well as the key ratios based on the market value of the corporation (EV/EVBIT which is market value / book value) the same like the example with no-cash issue.The Sector Internet Paying with cash – scenario column is shown the ratios in case M would acquire D with cash.67 compared to 6. This is because the number of shares is lower. the equity per as well as stock price / equity the same as the parent company´s before share the acquisition.

After this.6 KeyRratios and Income Measures in the Chosen Companies Looking at key ratios and income measures.6 billion SEK. 2001-03-06 72 . Amortisations according to plan was 667 mSEK and the Icon addition on write-down was 1. The largest amount considering write-downs among the companies was done by Medialab. The ”trend” among the mentioned companies last year was write-downs. only year.6 a decrease with 305mSEK (= 25 Solidity decreases from 67% 1999 to 44% in 2000 EBITDA increases from 6. one and therefore are not significant for the analysis. are lower in the year of 2000.3 2000: 88. Icon still has goodwill items of mSEK. Looking at Cell Network (example below) shows that almost all key ratios and income measures where increase is good. 462 71 Linnala. This influenced all key ratios. Some analystsequity to calculate prefer without looking upon them as one-time-costs that will affect profit only goodwill.The Sector Internet 5. and the opposite regarding key ratios where low rates are good. Cell and Adcore made writedownsto 6 billion SEK during 2000. In spite of these efforts their goodwill close itemsstill huge and considered ”bombs” by 71 and are a threat to the are analysts items. or write-offs. Icon. Cell Network Turnover 1999. notable. The goodwill issue is discussed by the board and CEO among strategies. we have found that most companies in our chosen population prefer to present them excluding goodwill. 1210 mSEK to 2000: 905 %) Ebita 1999: 62. of goodwill and it is not strange to assume that this will continue during 2001.4% 1999 to 11% in 2000 The four large IT-companies Framfab.

4 billion SEK which was around 50% of the goodwill item amount. In the annual report the company doesn´t specify the goodwill item.8 billion SEK from the goodwill. The stock price of Icon Medialab around the end of 2000 was: 14 SEK and in november 2001 it was bought and sold around 3. When looking at the write-downs one question is how it was financed. At the end of the year 2000 the goodwill item was still large enough to wipe out 57% of the equity. but at the latest the intangibles was 182 mSEK.The Sector Internet Framfab was another company that cut a total of 1. tells us that the item is of significance to the which stakeholders. Cell Network only made write-downs of 270 mSEK in 2000.75 2001 the SEK. Should all have been written down.stock price of Framfab around the end of 2000: 13 SEK and in The November price is approximately 0. 72 Linnala.50 SEK. A total of nine of the 30 IT. but had at the end year goodwill items of 880 mSEK. 2001-03-06 73 .72 (one of the 30 had filed for consultants bankruptcy when we “took” the list as research population) had goodwill that measured up to more than 50% of the equity. Adcore made write-downs of 1. of the the owner´s capital would be very small. which is 50 mSEK more than the check equity. It is safe to comment that the goodwill items are an even greater threat to the company in november 2001 than at the end of year 2000. only around 25 mSEK. Among other IT-companies in the chosen population Know IT stands out. The median value for the whole industry (includingcompanies and hardware sales companies) as a whole is that program goodwill up to around 44% of the measures equity.

c ompanies in research) had during the last 5 years made acquisitions at inflated high our prices could not stand against the hard times of sharply decreasing stock which prices and when the stock market´s interest left them. The business is changing again. many point out that they to widen the customer stock into the traditional industries such as want forestry.e.The Sector Internet In the year of 2000 many internetconsultants (our population. Few letting go of give promises for the operative part of the company. Some of the ways to improve numbers are reorganising. Many struggle with earnings but most of the companies plan to improve their market shares and to improve earnings. The result was great goodwill write-downs and in many cases the ”holes” in equity were covered by issuing a considerable shares. 73 Linnala. i. magazines. Also. How do the companies view their future? Most companies view the coming year as very important. and writing down intangibles (goodwill). and it is changing rapidly. number of new 73 All companies in our survey are often in the media such as analyses in business The articles lately have a more critical focus than one year ago. on. government and so defence. personnel. 2001-03-06 74 .

Sweden and Finland.The Sector Internet 5. In the report these posts have added into one. With the estimated life of 10 years this would have to Swedish added 16 million Euros in amortisation cost every year. if not impossible. should the deal have been accounted for according regulation. p. Also. if accounted for in Sweden. i.e. mentioned The Finnish regulations made the merger companies. added 687 million Euros in intangibles. and the total of 289 millionin intangibles for the year 2000. This used way to consolidate is not valid due to been Swedish regulation where equity is called for. 47 75 . to bear for corporation. During the year 2000 Tieto-Enator has gone through share transitions that would have resulted in addition of 305 million Euro. possible. This shows in the profit and method but as far as share in net profit no difference occurs for the loss account. the merger between Tieto Euros and Enator 1999 should have. The burden of amortisation would with knowledge of the present earnings have been too heavy. TietoEnator. This has influenced the way this company has chosen to merge. with the forthcoming of amortisation as life of estimated 20 years the annual amortisation would add up to 38 million Euros. Also TietoEnator has associated companies in which it holds items (intressebolag) per post in proportion to its shares. the 74 Annual Report. This is one way of looking into how using different countries regulation can ”change” a company´s intangible item.7 Differences between Swedish and Finnish Accounting Regulation Affected Merger Discussions for Tieto-Enator 74 It should be noted that differences exist between the two countries in which Tieto-Enator conducts business mainly.2000 .

The Sector Internet 76 .

Some weeks later we met the headlines in the press telling us not help that WM-data had to decrease the number of employees in its core business in Sweden with about 900 persons. In the end of October this had year announced a very negative forecast concerning the result on an Turnit annual Turnit explained the negative development as a consequence of a basis. This we do to get a better understanding of the handling of goodwill in IT-sector. In a situation like that it may be understandable that some companies do not prioritise to take time for interviews dealing with a hush period. which has during made our possibilities to get a deeper contact with companies for a case study more difficult. We were interested in a meeting with the CFO of WM-data and made several both by mail and phone to achieve this.e. one of the companies from our selection. 75 76 76 Press release Turnit 2001-10-25 Svensson. which may have to do with the fact that the number of employees in a number of IT companies has decreased substantially during this year. The prerequisites of our study of the IT sector have changed in an obvious way the second half of 2001. WM-data has a new CFO. i. 12 % of the total number employees. which we began discussing in the 5th the chapter. 2001-11-09 77 . instability and increasing competition. Due to that he felt that he and could us. We tried at several occasions to arrange a meeting with the CFO of Turnit. COMPANY CLOSE-UP We have chosen two companies in the IT-sector for a deeper study in this sixth chapter. attempts whonot participate during the work with the annual report covering year did 2000has no prior experience from the IT sector. The CFO was eagerly working with an interim statement and unfortunately not the time to participate. market 75 characterised by uncertainty. The sector is going downhill. We also experienced that companies did not actually have time to meet us.Company Close-Up 6.

HiQ had perhaps During an of caution in comparison to competitors that grew very fast air through acquisitions .se/bors 2001-11-10 78 . 77 www. 2001 can so far be characterised as a dramatic year for Swedish IT companies. agreed to see us.Company Close-Up Among the companies we contacted. 77 Well aware of this fact we decided to contact a company that swam against the stream and decided to make a case study of HiQ. During the second half of and 2001 the immediate risk of bankruptcy has increased for a number of Swedish IT companies. growing acquisitions. HiQ is a Swedish IT Company. a company which from many of its competitors in being differs profitabl IT company. They do not firstly focus on being “big” but on keeping through up a high quality. which partly differs from most of its competitors How? HiQ does not mainly put an interest in the magic of in Sweden. Huge financial problems have caused a vast number of consultants notice to quit the market for IT consultants has diminished. the superheat period in the history of IT Companies. The a e possibility for us to get information of high quality and of interest for our thesis our judgement in choosing a company without a severe formed financial problems . few were interested in discussing goodwill. the issue would have been more to research and easy discuss.Afv.1 HiQ International AB 6. We feel that if we Only those had contacted the persons at more lucrative periods.1 The Reasons for Choosing HiQ for a Case Study. 6. that did not fear the subject.1.

se 2001-10-29 Jennehov. In short HiQHiQ works with communicatio . In 1999. 70 % of the the operations systems development and development of embedded systems.79 Finland.1. 6.HiQ.1. Sonera Telecom Utfors ) 18 % ( e.g.g. Ericsson.g. In the annual report 2000. p 18 78 79 80 81 79 . - A Brief Historic HiQ started as HiQ Approve in Arboga. the name of the parent company focus on was changed from Statyetten Konsult AB to HiQ International AB and two subsidiaries were started.g.the turnover was divided in the following 81 12-31 segments: Telecom Suppliers 37 % ( e. year. consists of The remaining 30 % consists of management consulting. new subsidiaries in Denmark and Gothenburg were started through acquisitions and the same year a subsidiary was founded in 78 . Cisco ) Operators 26 % ( e.and managementnconsulting firm focusing on high technology in areas telecom. Swedish Defence Material Administration and Defence Ericsson Microwave) Finance 8 % ( e. mobility and simulation technology. Nordea and OM ) www.Company Close-Up 6.3 HiQ of Today.80 HiQ is an IT. Nokia. The Swedish national defence was was the base the customer and the simulation technology developed was used in JAS Aircrafts. HiQ Data started in Stockholm with a focus on the private The same sector and with the task of broadening the operations while maintaining a particular the telecom business line. Sweden in 1995. 2001-11-06 Ibid.2 HiQ Background. Telia.In 1998. HiQ International was listed on the OM Stockholm Stock Exchange. Simulation Technology of the company's operations.In 2000. HiQ Annual Report 2001. Telenordia.

Sweden. The market situation for Swedish IT companies is described by Anna Jennehov as increasingly cautious among customers. The vision has an impact on how the company has grown: HiQ’s growth is mainly organic but a few acquisitions have carried out. Jennehov. In order to maintain a high level of profitability and quality. 2001-11-06 80 . In total the group consists of seven subsidiaries and employs more than Scandinavia is a very interesting centre for companies in their business line.g. which also is what the name stands for. In year 2000 HiQ acquired a company in Denmark and one been in Gothenburg. HiQ points out important tools like recruitment of highly skilled consultants. more than 400 employees and a turnover of more than 400 HiQ has Mkr.g. who are end users. ICA and Aftonbladet) % ( e. This fact does not necessarily mean to be the biggest consulting firm. Scandinavia is the most important market for HiQ and businesses are also run in Norway and Finland. HiQ focuses on high quality. 82 83 HiQ Annual Report 2001.20 years of experience in their line of business). Volvo and Vehicles 4 Automobile) Saab During the last years business activities are widened into new fields like medicine and utilities. p 27. of HiQ’s consultants are highly educated ( 87 % of the employees Most are university graduates) and have a solid professional experience ( 57 % of the 82 They work employees have 6 . with advanced technology in long term relations with customers.Company Close-Up Other 7 % (e. a high degree of 83 chargeable time and control of the level of the average pricing. Growth HiQ’s vision is to be the best consulting company in the fields telecom and mobility in Europe with a base in the Nordic countries. Also big customers are definitely more prudent in their procurement of services. Both acquired companies are profitable and their businesses easily pay off the acquired goodwill.

have an excellent circle of customers and fit in to the business ideas of HiQ’s. HiQ WISE in Denmark and HiQ Open in Gothenburg were acquired. CFO During our meeting with Anna Jennehov.Company Close-Up Although organic growth is the most important way to get bigger.1.) I Anna Jennehov pointed out that the aim of running the business is of course to manage the company according to the going concern assumption.4 Interview with Anna Jennehov. 2001-11-06 81 . HiQ is not overall negative to acquiring companies.7 Mkr of which investments in goodwill was 103. The 84 Jennehov. 6. The negative impact of goodwill on traditional key-ratios and how this may influence the choice of which key-ratios to disclose were briefly discussed. After acquiring companies margin before goodwill is more frequently used. According to Anna Jennehov. The two new subsidiaries were consolidated from 2000 and goodwill is amortised over a period of 10 years. CFO.4 Mkr. The management has an open dialogue with HiQ’s auditors about how to handle The management’s viewpoint about amortisation of goodwill over goodwill. The is companies HiQ during 2000 are profitable. During 1 May the financial year 2000 no write-down of goodwill is done in HiQ. goodwill is considered to be “an investment like other investments in the company” (en investering som alla any andra investeringar företaget. we discussed the management’s thoughts around HiQ’S goodwill item. but companies in question must be profitable. a period of ten years is in total conformity with the auditor’s opinion. In the year 2000 total net investments of HiQ amounted to 115. growth and margins show a acquired by positive 84 development and they both pay off the acquired goodwill. This is why it of great importance that the acquired companies are profitable.

according to Anna Jennehov.Company Close-Up orientation towards the result of the business is more clear and relevant when disclosing margin before the impact of goodwill. 82 .

A brief Historic TietoEnator is the result of a merger in 1999 between the Finnish company Tieto Swedish Company Enator. In the press 85 86 85 86 .2 TietoEnator 6. which in comparison to HiQ is bigger and more internationally established. it was pointed out that the Hallsenius. Our second case study describes TietoEnator . TietoEnator Background. This business transaction was received with and the a of attention and was of course followed by the press. 6. TietoEnator has its head office in Esbo.2. she has taken part in our study by using e-mail and Instead telephone. Susanne Lemström. there have been a number of mergers and acquisitions over the years. so the context of purchasedis something quite familiar to the company.2. We believe last that is one of the reasons why these two companies are more positive and alert this in responding to our contact with them. One thing in common goodwill with is the fact that TietoEnator has had a more positive development during HiQ the year than the rest of the IT companies our study concerns.Company Close-Up 6. In line with its size. Finland and are listed both at the Helsinki and the Stockholm Stock Exchanges. We find it contributing to our to include the thoughts around goodwill and standard setting in the study IT business from a more international company. Unfortunately we did not have the possibility to visit our contact person. 99-03-04 Wallén.2. why our attempts to involve them in our study is not given priority. who works with issues concerning Shareholders’ and Public Reporting at the Finnish Head Office. Many other IT and Internet Companies have an extremely difficult situation right now. 99-03-09 83 . M.1 The Reasons for Choosing TietoEnator for a Case Study. Some considered lot it questionable weather the deal really was a merger or not in fact an acquisition through which Tieto acquired Enator.

Celsius AB. was listed on the Stockholm Stock Exchange. forest and energy 84 . The group’s product customers act in business lines like bank and finance. The Finnish consolidation principles were more liberal than the Swedish and the pooling of interest method was approved to be used. During the company’s first years IT systems were developed and maintained mainly for Union Bank of Finland and its customers. This group was formed by a merger of three separate IT-related subgroups. In 1996 Adedata was acquired and the new group. By the end of the nineties a number of acquisitions were carried Sweden and in other European out in countries.2. Tieto started its business operations in Finland under the name Tietotehdas Oy in 1968 .000 of which about 3000 in Sweden. Enator and Dialog. Enator’s owners would only about 31% of the shares in the new group and the total market value control was estimated to 7.Company Close-Up deal was not between two equivalent partners.1 billion Euro. of value-added services with a turnover of TietoEnator example systems development. Enator. merged its IT-related operations and the Enator Group was created. By this followed that a goodwill item of five billion SEK never occurred in the group accounts. the public sector. The people. TietoEnator has operations in 19 countries 10.2 billion SEK for Tieto.8 billion SEK for Enator and 18.2 TietoEnator of Today. development services. management consulting. and for a small number of forest industry companies. operation and support. namely Telub. In 1995 a Swedish listed company. Tieto’s customer base grew in the following decades and during the 1990s the company experienced a rapid growth through a number of acquisitions and alliances . integration. offers for and employs more than group is a leading supplier about 1. 6.

so local regulations are used. Goodwill Concerning goodwill. The management’s opinion concerning issues the goodwill issue is in accordance with the auditors’ point of view and no specific comments were made in connection to the answer. goodwill is amortised over a period of case ten years. In connection to the questions directly dealing with goodwill. No adjustments of its growth strategies established. 2001-11-08. The base for growth is in ready-made solutions wide and in partnership in the Nordic countries as well as in is world continental Europe We asked Susanne Lemström to describe TietoEnator’s strategy concerning if any adjustments of this strategy had been carried out growth and in consequence to a more difficult market situation for IT companies. we asked about the opinion concerning how goodwill affected the choice of key-ratios.Company Close-Up industry telecommunications.Lemström had the impression that financial analysts have focused Susanne more 87 were Lemström. The annual target is 20 % : 10% through acquisitions and 10 % organically. both by including and by excluding goodwill. The parent company is Finnish. In of a more strategic acquisition. write-down of goodwill is No made. One of our questions to TietoEnator concerned how the dialogue with the auditors about the goodwill issue looks like and if the attitudes toward these differed and in what way. growth The operating profit (EBIT) is targeted to be above 10 %. TietoEnator discloses earnings per share. TietoEnator uses an amortisation period of five years. 85 . Growth and 87 TietoEnator's growth targets are said to be achieved through a combination of organic growth and acquisitions.

88 89 Lemström. Large amounts of goodwill occur in connection them to acquisitions of IT companies and this will effect non restricted earnings and further restrict profit distribution in the parent company. which according to Lemström’s opinion will be test on an very difficult to 89 achieve. 88 Finally our respondent shared her views on the ongoing debate about goodwill in IT sector. 86 .Company Close-Up and more on results before the impact of goodwill. Susanne Lemström question about what will happen when they will have to poses the prepare statements in accordance to IAS. Due to that scenario goodwill must financial be allocated to the line of business level. According to her point of reference the resistance to apply the the pooling of interest method has a negative effect on acquisitions or even stops in many cases. 2001-11-08. 2001-11-08. Lemström. Companies must then make an impairmentannual basis.

it seems that accounting issues dealing with intangible assets in large and goodwill in specific are of current interest in the Swedish and in the international accounting debate.. In general it must be considered a harder issue to identify benefits to an intangible asset than to a tangible assigned one. This 87 . not least from an international perspective. ANALYSIS Our analysis will be based upon the seven topics presented in chapter 2. There are also difficulties involved when forming an opinion on economic life of assets of this category. The value of intangible assets can the be to lie in future economic benefits such as cost savings or increased said future earnings. Due to the remarkable development in the IT sector.Analysis 7. These concepts have had an important role when collecting data and therefore be the foundation for this they will analysis. Intangible assets may be diffuse to recognise and therefore complicated to clearly define. and could therefore be described from different perspectives . Figure format : T S G in mini T= Traditional accounting S= Stakeholders P= Purchase strategy I= International influenceSwedish ITS= sector N= ”the New Economy” G= Goodwill P I S N The concept of goodwill as well as the accounting treatment of goodwill must be regarded as areas full of nuances and interpretations. which we find have an important impact on the IT-sector and goodwill accounting.

Analysis attention is noticeable not only from the regulators point of view but also from in business life. is one very important way for a company to communicate with its stakeholders. External information annual reports in specific and external accounting in general is provided in of importance as a mean for the company to get the stakeholders´ trust in utter its business. investors. To analyse the aims of external accounting and the fact for whom the information is presented must be considered a base for demands raised on accounting regulations and the design of framework for external accounting provided by companies. In chapter 3 we discussed two basic concepts concerning accounting. 88 . including the annual report. IT companies and other knowledge intense companies actors in New Economy” often act in an international environment and it “the seems therefore seemslogic that accounting regulations are created to fit an emerging international market. Owners. External accounting. are interested the public. To disclose correct information must be considered a prerequisite for survival in the financial long run for a company. namely the concept of a true and fair view and the prudence concept. To inspire confidence in a company and in its financial information is a crucial task for management and for the company’s auditors. analysts. Different kinds of stakeholders in different kinds of information. government and creditors represent groups of stakeholders that have interests in financial information provided by a company. Another important use of the external accounting is the possibility to control in what way legal regulation is followed and to what extent stakeholders’ interest is taken care of. various The information given will be important as a ground for financial decision-making in order to buy or sell shares in a specific company. External Accounting Information – Basis for Financial Decision Making. to provide a company with and for giving a correct picture of a company’s financial position credits to customers and suppliers.

Analysis The need of information to assess a company’s possible profitability or to evaluate future cash flow is fundamental for most stakeholders. One way to secure the quality of external accounting information and to provide information to different kinds of stakeholders is to set adequate accountingThe standard setting work is important both on a national and on standards. Rather than the rules amortising income. One reaction to the new rules by FASB may be that there will be negative from the market when an impairment is done in comparison to the reactions prior scheduled amortisation charges. important adjustments of shall be the American regulations. FASB In the United States FASB (Financial Accounting Standards Board) has changed radically for the purchase method of accounting. companies will now have to review goodwill goodwill to for impairment. goodwill was approved to be amortised over a period must not exceed forty years. According to American accounting standards purchased goodwillcapitalised as an asset. which in comparison with most which other countries was extremely liberal. A Renewal of International Standards on Accounting for Intangible Assets. To increase the credibility of accounting and to reduce differences between companies in what is information externally are perhaps the most important objects for standard setting presented work. an international basis although development of accounting standard setting during few decades implies that this field more and more is a matter the last of international harmonisation. Prior to the recent. Does an impairment signal bad news about the company and future results? The new regulation FAS 142 does not require a permanen decrease of value to demand a write-down of goodwill or of t some 89 . One objective of external accounting must be to enhance the possibility for sound financial making for all interested decision parties.

has its explanation in the fact that the pooling of interest does not require the buyer to record goodwill and by this follows that method no amortisation earnings. According to IASB. wherefore it might be hard to follow the development and position of a company as regards this area. By this follows that that the pooling of interests method no longer will be applicable. In IAS 22. a company should amortise 90 of goodwill will charge .Analysis other intangible assets. The differencethe cost of the purchase and the fair value of the net assets is between recognised One central change in the revised IAS 22 is the fact that the as goodwill. will probably have a restrictive influence on growth strategies in American business life. states its recommendations dealing with business combinations. In accordance to this standard. Meanwhile. Intangible Assets. The pooling of interest method has been widely companies growing by mergers. absolute useful life of goodwill. The amortisation requirements regarding goodwill are stated in IAS 38. Another very important change of the American regulations concerning goodwill is the compulsory application of the purchase method in case of a merger in accordance to FAS 141. The frequent use of this accounting model rather than purchase accounting. (International Accounting Standards Board). (International Accounting Standard 22) the international standard setter IASB. 20 years. In a very longrange perspective there are international efforts to achieve a set of uniform accounting that may be accepted on stock exchanges worldwide. This new accounting regulation used by by FASB. The current version of 22 has been operative for annual financial statements covering periods on IAS or 1 July 1999. acquired assets and liabilities should after be included in the consolidated financial statements at fair value. regulations we to look at international differences in accounting standards have setting. can be exceeded in rare maximum cases. IASB In the long run there are efforts to make standards set by IASB applicable on group accounting in all member countries within EU.

for example a stream of income. it is obvious that the international influence on the national setting is crucial. When describing the renewal of Swedish accounting regulations in the field of intangible assets. Sweden is a small country and as on stock such it seems even more vital to adapt to international development in the area of accounting. as described above.Analysis goodwill over a period reflecting its useful life. at a useful life exceeding the twenty year limit.00. may occur. an extension of that time limit only in extraordinary cases. allows. To Sweden and Swedish companies it will probably be a matter of increasing importance to actively take part in the international standard setting organisations like EU and IASB. In this way there is a possibility to work in get Swedish views on accounting regulatory work met. must be looked upon e facts pointing as rather harsh formulation of the requirement to fulfil this a criteria. Swedish Accounting Regulation on Intangible Assets: A matter of CrossBorder Regulatory Work. One example of this is the in recently revised Standard RR 1. In case of persuasive evidence that the useful life will exceed twenty years. but provided that the time of use can be shown to exceed 20 be years of 91 . According to the new recommendation from Redovisningsrådet in Sweden. IAS 38 is founded on the assumption that it is rather unlikely that the useful life intangible assets may exceed twenty of Persuasiv evidence years. the maximum amortisation period will continue to 20 years. goodwill should providing be amortised over its estimated useful life. This development must be considered very standard important companies since the possibilities to establish abroad and to be to Swedish quoted exchanges abroad will increase. that has its prototype in IAS 22. IAS 22. The amortisation period should reflect the expected time span over which future benefits.

traditional meaning often refers to plants and Capital in the production New forms of capital have become of great importance when equipment. According to chapter 4. In the last years intellectual.Analysis there is possibility period. Information provided in the income statement showing flow the of transactions over a period of time grew in importance in comparison flow to balance sheet showing the balances of a specific the date. “the New Traditional accounting systems can be regarded as focused on transactions and historical costs. a in cases exceptional for a lengthening amortisation of the A renewal of Standard RR 1. on and change. In light of the emerging number of acquisitions in business life. which are things hard to see and measure. valuing a company. purchased goodwill may be accounted for as an intangible asset. companies and countries can be connected electronically. section 2 of Årsredovisningslagen (The Accounting Act) in Sweden. Products. There are opponents to this traditional accounting system asking accounting for companies in “the New Economy” may need a new set whether of measurements to give another perspective on a company’s result and financial During the last decades business people have started to focus more position. “The New Economy” The increasing value of intangibles may be traced to information and relationships. the purchased will probably be an issue of rising importance not only for goodwill companies sector but also for companies in more traditional lines of in the IT business. people. 92 . human and structural capital have been in focus.00 will be adopted in Sweden and applicable to financial years starting from 1 January 2002 . These are factors that can be referred to as components of the concept Economy”.

The purchase method would have brought goodwill to large amounts. HiQ preferred HiQ. One important factor when acquiring a company. TietoEnator. be reflected in the emergence of huge goodwill items in connection This can to acquisitions . This is exemplified the bad with one of the companies we have presented in a close-up. Investments of this type are accounted for in the same no matter in what form the payment of the shares is way made. according to HiQ. to grow primarily organic but did also acquire companies provided that they were profitable. is the acquired company must have ability to pay off the goodwill acquired that in connection to the transaction. Business Focus A number of acquisitions in the Swedish IT sector were financed by the acquirer issuing new shares and using the new shares as payment for the through acquired The emergence of purchased goodwill is not affected by this way company. of the the pooling of interest method was of utmost importance for both companies. and the companies themselves say that it is not clear whether the deal would have taken 93 . a company’s assets and liabilities and the market value of that company’s shares. the purchasing strategy and the pooling of interest strategy. Growth through acquisitions was an every day phenomenon to many actors.Analysis One characteristic of companies taking part of “the New Economy” is the speed in growth. It is interesting to notice that those Swedish IT companies that followed a more traditional and cautious way of acting during the end of the 1990s have handled times for the sector in a better way than others. At the time merger between Finnish-based Tieto and Swedish-based Enator. of financing an acquisition. The other company that this thesis describes in a close-up. It is obvious that in companies acting in “the New Economy” during the last few there has been a major discrepancy between the book value of years. is an example of a company choosing a blend of the two strategys.

It was suddenly a grave threat to the companies. Framfab. but that was possible when the purchases. When the business faced the downfall this item became more focused upon. but actually in surviving. The potential concerning the ticking bombs hidden in huge goodwill items seemed problems to have been neglected or perhaps not even understood by many.stock prices) had fallen from great sizes to almost nothing. The the Annual Reports. The market’s pricing of companies in the IT sector seems to have been too optimistic. in reports. and the investors were becoming skittish.Analysis place should the chosen method not have been possible. This can be explained in from the fact that investors did not offer new capital to the industry. Cell Network and Icon Medialab had great difficulties not only in coping. The purchase method have been to expensive to carry would forward. It was a fact that earnings did not meet expectations. The earnings had not met expectations. and that many of the spokespersons from it considers current accounting regulations unfit for their purposes and business is well-known. The fact that the business is ”new”. The comparability between chosen ways to present each company´s values are subjective and differ greatly. This pictureseen all through the was industry. The values in the industry is not believed to be seen in traditional companies try to explain these values in their own way. The “big” pioneers. and also the whole corporation had lost not maybe 94 . or to put it more clearly. The goodwill item was from the beginning not really discussed. The demand for product and services that the industry did not increase but decrease. The amortisation could easily be explained when the purchased companies were considered valuable. provided. The issues around goodwill items that occurred during year 2000 had from our of view to do with acquisitive business strategies with focus on highpoint speed expansion together with the neglect of profitability. did not even cover the costs of the same companies.e. which was considered overvalued. The industry during the year 2000 suffered. Their market values (i.

was an early actor in the Internet business. the companies have changed the they present themselves. The hard times are visible in the reports. Some companies still can not “proper” write-downs since the cost would throw them into bankruptcy. since easy to compare reports directly. but the industry´s economic prerequisites change Regulation with moodswings of the business the life. Understanding key ratios and income measures is of utmost importance for readers of economic information from this industry. and mobility to diversifying into many fields. and defence. As a part of a cleansing. and present the names of well-known customers demand from traditional industries. reorganizing and writing down goodwill. From the Annual Reports different conclusions can be drawn.Analysis 90 % of its market value. of which Hiq is one. and according to regulations goodwill. like car manufacturing. The “boring” traditional industries are at present used to bring security to the shareholders. It is clear that key ratios presented it is not are 95 . the outcome is lower when calculating way key and other measures than those from earlier years. to the market. Looking at key ratios and income measures. and legal. Today. medical companies. It can also be hazardous since new markets are set on unsteady ground and laws and regulation have not adapted. Early entrance can be successful. the companies were forced to make huge write-downs concerning in order to seem responsible. but this is not enough picture will probably remain for the IT-industry for some and this years. both in comments and in numbers. show charts on the upgoing for their services. Instead strengths ratios are presented mostly in facts of diversifying into new markets. The strategy of having customers from several industries may be used to calm the influence of business life and to spread the risks of one industry down having difficulties and cutting down on buying IT services and IT products. internet. do The industry has made write-downs of almost 6 billion SEK. try to keep up. Many IT companies try to diverse from having a few large customers from telecom. Many companies. The vision of great expectations and bright future has been changed to explanations on how to survive. The way the companies present themselves in the Annual Report have changed. as well as the USA. Sweden Finland and others.

No old industries. the largest companies were considered strongest by the market. and they said. been set equal great market shares. ways be used to understand this the new way to conduct business. The different ways to purchase or to merge with companies in order to grow and to gain synergy effects differ. The new could men women that lead the way had not much in common with the old ways. Note that in almost no discussions the issues of earnings or goodwill amortisation were seen as problems. In the industry we are looking at. Purchasing Strategy – Good or Bad? In many new markets. and their purchasing strategies were applauded. like HIQ. traditional and the concept “the New Economy” was founded. This is one of the reasons for choosing a purchasing strategy. Also. size is considered a great advantage. since establishment on a new market was considered great key success early factors. Those companies that did grow organically and a restrictive purchase strategy. History in economics contain the introduction of new markets. The large companies had great influence in the business life as well and they were considered winners by the market.Analysis chosen with care so that they show one side of the company. The soft assets were considered and valued as the “gold reserve” in the company and these items explained what the goodwill item really consisted of. here the old and the new size has agree. This is also discussed above. from all over the world handed for example Framfab money to get Investors a lead position in the race towards market shares and lead position. and wanted to seem separate from the old. were considered boring by had the 96 . In new markets. The industry was new. sizewise. entrance in other markets other than the Scandinavian was considered early a future key success factor. So. Today the IT sector rather traditional key ratios and measures compared to the ones that present was presented when the industry was on a high.

To turn mobile to government with its healthcare. defence.Analysis investors in the beginning. the industry has to make writeon their remaining (still large downs huge amounts) goodwill items. The market is not always consistent. Some of the companies do not seem to be able to afford this. Today the picture is different. Also. but it brings large survival some for time. This is often done cash with deficits when looking at purchase price and sale price. From the beginning the purchasing strategy was applauded. and if regulation would force them. The IT Sector in the Near Future What will happen in the future? As said before. This means they will try to expand the customer g from mostly groups and telecom industry to more traditional sectors. Also forestry. in the end it was rejected. Many companies are forced to sell their subsidiaries in order to get petty to survive until the down period sets off upwards. they would have to file for bancruptcy. many companies talk of diversifyin as strategy. medical industries and other smaller business are focused upon. HIQ is considered reliable and strong. 97 . schools and other´s are examples of this strategy.

Analysis 98 .

degree of transparency may have a positive effect on the stock A higher market and may lead to better evaluations of companies. No limits are set regarding the voluntary but understandably enough companies may hesitate to disclose disclosure. knowledge give intense companies. can to a large extent complete the picture presented other in income statement and balance sheet. 99 . in particular. CONCLUSIONS AND REFLECTIONS 8. Underlying facts concerning position and result of a company can be highlighted in notes. the main issue: Is traditional accounting regulation applicable on companies in ”the Economy” where growth through acquisitions was believed New a key success factor superior to organic growth? General Conclusion The international debate concerning goodwill and other types of intangible assets the topic that accounting regulations in force may fail in the attempts includes to the correct picture of the value of.Conclusions Reflections and 8. too much when taking competitive considerations.1 Conclusion We now return to the basis of this research. Open disclosure and additional information concerning goodwill and intangibles in notes. There may be pressures for extended disclosure concerning goodwill in financial statements in the future to avoid negative reactions from the market.

To consider the purchase price for goodwill from another point of departure than is done with tangible assets. Companies in this sector external of Swedish business life could be characterised by explicit acquisitive growth during a brief period. employees.of goodwill and other intangibles on at least a yearly down basis. been quiet about what does not fit into this “the The industry new 100 . Instead. there will be considerable differences between companies applying accounting recommendations according to IASB and others using standards provided by FASB. so far. by which followed vast goodwill items in strategies annual accounts covering year 2000. has not. According to interest recent regulatory work presented by FASB in the United States. The value of purchased goodwill is subject to amortisation reflecting the fact that the value probably declines over time. If not. In consequence of this. From the material we have presented in this thesis it is clear that according to Swedish regulations purchased goodwill should be regarded an asset. This new regulation will probably affect IASB to take actions in the same direction. The importance of in the adequateaccounting information must be highlighted. the economic life of goodwill and certain other intangibles will be considered constant. analysts. companies will have to test whether there is a requirement for a write. does not seem correct concerning whether to amortise goodwill or not. Accounting issues concerning goodwill and other intangibles are of current in large international standard setting bodies. The opinions of stakeholders like shareholders. and accordingly recognised in the balance sheet and amortised over its economic life. These diversities will result in enhanced in comparing and analysing companies on the international difficulties arena. no amortisation according to plan shall be carried out. government will have to be considered for evaluating new ideas for and others regulation.Conclusions Reflections and The question of credibility must be considered crucial to most companies acting Swedish IT sector during the last few years.

the accounting rules are maybe not directly applicable to New Economy”. This new group play by the old rules and the reason for this is that they are pioneers in does not a new business (that does not have its like at present). the traditional must ways stay. Should the European regulators and therewith Swedish regulators. But for the year 2000. although population all within “limits”. and so does the size of their goodwill items. many will have problems with handling rules with this without risking the company. regulations and the same time few companies showed positive operative and earnings. The evaluation of goodwill seems to differ vastly keep between the companies. the write-downs were huge. But since ”the the market does not seem sure about how to regulate the new values. verbal. although the debate is less today. follow the American the impairment test. like regulation on accounting and other. All the companies in our research differ when applying these sets on their own accounting. It is also important to know that the persons that lead these heated new companies are not from the same groups that built the industrialized world. as far as the industry itself wishes to see it. So to answer shortly. bold computerized generation. 101 . The IT sector in Sweden has the following set of rules to follow: the Swedish rules.Conclusions Reflections and economy”. Many have made vast write-downs but not all seem to have written off enough. The ingeneurs and the business people have a new group to consider when ruling the business life: the young.

Conclusions Reflections and 8. FAS 141 and 142. What impact will the new regulatory FAS work with goodwill have on business life in the United States? How will dealing the regulation affect the inclination to business acquisitions when the new possibility to use the pooling of interest method has vanished? Closely connected to this is the question whether FAS 141 and FAS 142 will an impact on the regulatory work conducted by IASB and EU? In have what direction will that work move? 90 Leijonhufvud. a number of the businesses in the sector are months facing bankruptcy.2 Suggestions for Further Investigation Connected to Our Field of Research. What will the sector look like in a year? Which companies are the survivors and why? What did their acquisition strategies look like? Another field of interest is the new set of regulations by FASB. 2001-11-15 102 . At presentabout twenty Swedish survival IT companies are in the danger-zone to empty their cash and bank within a period of about six 90 . In fact. We consider it very interesting to conduct a study of the Swedish IT sector in about a year or two from now. concerning goodwill. The reason for this is the actual threat against for numerous IT companies.

M (1999) Juridik AB ”Immaterialrätten introduktion”. M. I . AB Davis. Eriksson. Merriam. Lars. Thomas. Finn. Vernon. T. Copyright Ernst & Young. Raymond (1995). Studentlitteratur for ”Accounting Assets”. Brockington. R.& (1994). Enligt den nya Näsviken: Björn Lundén Information årsredovisningslagen”..Bibliography BIBLIOGRAPHY Books Alvesson. Capstone Publishing Limited. Malmö. C (1998) BLUR the speed and change in the connected world. ”Accounting Theory”. Meyer. Addison-Wesley Company Sköldberg. Kinnear. (1998) ”Bokslut & Årsredovisning. Wiedersheim-Paul. Fallstudien forskningsmetod.McGraw Hill Publishing.. Levin. C. an applied New York. James. Oxford Centre for Innovation... B – en Stockholm: Norstedts som Lund.. S. “Tolkning reflektion: Intangible och kvalitativ Lund.(1990).. Sharan. of Bath. Nilsson. Jönsson. ”Att och utreda forska New York. vetenskapsfilosofi metod”. L. Lund University Press. Liber a Ekonomi. Kam. approach”. Wiley Press Ltd. (1994) Studentlitteratur . B. & Taylor. och K. Publishing Universit y Dahlin. Sven-Arne (1998) Storbritannien. & Lundén. ”Marketing research” – (1996). (1998) rapporter ” . Tyskland USA Redovisning av Goodwill – Utveckling av metoder i och .

International Accounting and and Sons. Grey. (2001) hastighet och affärslivet i ”Tendenser i börsbolagens årsredovisningar 2000AB.0 ”. Schweis. Stockholm. Stockholm 2001 Svenskt Näringsliv.J (1997) Multinational Enterprises. ”Den nya ekonomin – Hårda data om den nya ekonomin 2. Rolf (2000) Stockholmsbörsen Stockholm Strannegård Lars. Stockholms Fondbörs AB – Bokföringsnämnden. OM lek. Employment and Communications. Stockholm. John Wiley Inc. Raster Förlag Other literature Ds 2000:68 (2000) IT – an Engine for Growth. Det nya näringslivet. H. USA. FARs Samlingsvolym 2001. Rundfeldt. Knutsson Margit (2000) Gamla redovisningsprinciper i ny ekonomi! Svenskt Näringsliv . Lee. FAR Förlag. Robert F. Föreningen Auktoriserade Revisorer. Robert P (1999). Ministry of Industry. 1998. . Tryckmedia AB. Stockholm (2001). York. Friberg Maria Already elsewhere identitet – om ”. Fourth Edition. ” Finansanalytikernas II . Sveriges Finansanalytikers rekommendationer 2001”.Rolf Tendenser I börsbolagens årsredovisningar (1998). Stockholm Förening. p 5. FAR INFO 12 / 2001. Sidney.Bibliography Radebaugh. intangible New Reilly. Ljunglöf AB. McGraw Hill Publishing Rundfelt. ”Valuing assets”. Svenskt Näringsliv.

Näringsliv 2001-1115 Linnala. Vanskligt för aktieägarna att lita på bolagens Dagens . 10/2001. ”Enator blir Dagens Industri 99-03-04 Svensk a Hedberg. J. Daniel (2001) ”Mörkt för WMdata”. en utmaning?”14-18.” (2001-02-28). (2001-02-28). C (2001) ”Redovisning av goodwill. Sophie (1999) ”Värdet av goodwill trollas bort”. finskt”. Nyheter 991114. Tomas (1999) ”nternetaktierna får sin näring från media. Linnala.Bibliography Statistiska Centralbyrån. avdelning EKO. Rankin Johansson. Svenska Dagbladet Leijonhufvud. Nrdok1 1999-0525 Article s Hallsenius. 2001-03-06 Dagens Industri Dagens Nachemson-Ekvall. rapporter. Svenska Dagbladet. 2001-11-09 III . Industri . Dagblade t Hedensjö. Jonas (2001) ”Avgrunden närmar sig för IT-bolagen”. Dagens Industri Balan s .” (99-08-28). p Svensson. De nya nationalräkenskaperna. Björn (2001) ”7 miljarder i förlust förra året”. Christer (2001) ”Nyemission svår väg få nytt eget kapital. Thomas (2001) ”Goodwill posterna en tickande bomb”.

vapen”.15. 2001-10-26. 99-03-09 .afv. ”Pooling Finlands hemliga Dagens Industri . M. www. perspectives and EU The European Accounting strategies”. 2001-11-03.di. Merger Accounting Guidelines.asb. Vice President Cisco Systems. 2001-10-29 www.p 215-239. C (1994) “The harmonization of accounting within the – Problems. P. Fortun e IV .com 2001-09-10. www. Goodwill Hunting Season. 2001-09-07. www. Review 1994. ml www. (2001) ”Turnit Dagens Industri Information from the Internet http://www.eLibrary.10.Bibliography Thorell. D. J. www. 2001-10-25 Press release vinstvarnar”.2001-11-20 2001-10-12 www..afv.hiq. 3:2. Hearing on Pooling Accounting 2001-0302. 2001-09-10.eLibrary.

Shareholders’ and Public Reporting. Anna. Esbo. Company reports Annual Reports from 1999 and 2000 for all chosen companies. 2001-11TietoEnator. V . Ernst & Young. Gothenburg 2001. HiQ. Susanne. Authorized public accountant. E-mail interview with Lemström. Uno. Finland. Stockholm 2001-1106.Bibliography Interview s Meeting with Jennehov. Discussions with Lindgren. 08. CFO.

com MSC B 19 Novotek B 21Proact 22 Pronyx 23 Resco B 24 RKS B 25 Softronic 26 Teleca B 27 Tietoenator SDB 28 Turnit B 29WM-data i . that sell or distribute computer Companies hardware. and datastorage. 601 0 1 Adcore 2 Adera B 3 Alfaskop 4 AU-System 5 Cell Network 6 Cyber Com 7 Dimension 8 Enea 9 Framfab 10 Frontec B 11 HIQ 12 Icon 13 IMS Data 14 Kipling 15 Know It 16 Mind 17 Modul 1 18 Mogul. The Magazine Affärsvärlden´s website at 2001-07-20 The IT-consultant companies index of 29 Explanation : 60 IT 6010 IT-and internet consultants companies that provide IT and internet Consultant solutions 6020 Software Software producers 6030 Computer distributors and sales producers of computers and accessories.Appendix APPENDIX 1.

how? Key Ratio Focus 1 Has the goodwill item influenced the presented key ratios in the Annual Report? 2 Profit with dilution? Warrants? owners (=56%). changes in the industry brought any change in their 5 Have strategies? 6 Adaptation to the industry? a description on acquired value (in Swedish Annual Reports 7 Ask for Hiq parts between goodwill and acquired value (=affärsvärde)item is one part. which we want to the understand) 8 Acquired business value is amortised in 5 years. Education. earlier work experience and so on 3 Give information on the fact that we have studied the Annual Report 4 Addition concerning acquisitions (in Swedish: förvärv). goodwill in 10 ? 9 Why haven´t they put acq. age. Business value in the goodwill item? redovisar ni goodwill ( för HiQ menar vi även ingår 10 Hur förvärvat affärsvärde) 11 ? Amortisations? 12 Is there within HIQ discussions on whether you would like the regulation on goodwill to be different? If so. the owners are security brokerage companies. and has been translated for the thesis) 2 Ask Anna Jennehov to introduce herself. affärsvärde is another. Do they have a long term commitment? 5 Discuss. reading the Annual Report.Appendix APPENDIX 2 Questions for HiQ Interview 2001-11-06 (The interview was done in Swedish. positive or negative in these bad 3 Foreign times? 4 Mostly. Comments on the Cash Flow Analysis? ii .

”investments that can be said strengthened the capacity is low compared with those which have kept the same. How does their austerity plans in your operations? 7 Finance and Defence industries. 3 In your strategies you talk about growing organically and at the same time”goal is to be leading consultant in Europe regarding telecom and mobility”.Appendix 6 HIQ´s customers come from telecom (37%) industry (ericsson. possible without acquisitions (organic growth)? How does How is this HIQ respond to that today. iii . and at the same time that the market and for consultant 8 s Have the events during the year changed your view on acquisition strategies? (framfab almost filed for 11. in order to dilute threats from down periods in specific 8 Inindustries? Report 2000 no write-downs on goodwill was to be found. icon. Discuss. ms2 and others have great problems…) In General on the Industry – A Reality Check? 1 Many IT-companies have heavy goodwill items. frontec. motorola) and telecom operators (27%) (banverket.industry ? 2 Notation 36. The business cycle for these industries are at a downfall. are they markets you want to expand on. have the focus stayed European or is it Scandinavian? 5 Long term financial goals is organic growt of 30% and an operative margin 15%? Are they realistic of today? 6 Långsiktiga finansiella mål org tillväxt på 30% och rörelsemarg om minst 15%. netcom. 7 Has the fact that many of the operators in the market have great problemsare letting personnel go. sonera. explain please. were they not known by end of the the year? Additional Questions 1 How does Hiq cope with the weak business cycle that is reality for the IT. Also Internet companies. competitors are cheap to buy and HIQ have cash and balances……? bank 4 They act in Norway and Finland. nokia. the Annual Is this still the case? If write-downs have been made.

Appendix 2 The debate on goodwill has been brought forward mainly from companies with acquiring strategy (in stead of organic growth) and who have paid mainly with stock in ”inflated” 3 prices.Discuss. 8 Today the Will this bring difficulties in accounting. Birgersson and Stael von Holstein have been? Has HIQ acted in another Have they shown a misleading way? 7 picture? Has globalisation brought uniformity to handling intangibles and goodwill? differences grow between IASB and FASB (Europe and USA). knowing that Hiq have owners from both regions? iv . Have the communication with the auditors changed? the control of goodwill 4 Has changed? (AJ) that the big downfall within the industry could have 5 Do you beenavoided? 6 How important do You consider that the ”big” voices in the industry.

are interested in the strategies until now concerning We acquisitions. years.Appendix APPENDIX 3 Mail questions to TietoEnator translated from Swedish. goodwill? (are) this (these) method/s Why is chosen? any impairments of goodwill carried out? Where appropriate 5. the 1. Please describe the strategy/strategies of TietoEnator concerning growth. made? Has your opinion on how goodwill affects key-ratios changed over time? are referring to the turbulent development for your line of We business the last few during 9. do you take the effect of goodwill in consideration? How has this influenced you and which choices have been 8. a description of the owners and the profile of employees. geographical spread of business activities. type of customers. have any opinions on the goodwill debate that has been going Do you on concerning companies in your field of business? v . Is a dialogue conducted with your company’s auditors concerning the handling of goodwill? What does the dialogue look like? Is there a conformity between the auditors’ point of view and the company’s opinion subject? If not – in which areas are on this discrepancies? 7. As an introduction we would like you to give a short description of the company size. 2. geographical markets and so forth. aim and direction concerning of business activities. Key-ratios : When deciding what key-ratios to disclose in the Annual Report. Are Forwhat reason? 6. organic growth. Please describe how goodwill is handled/accounted for within TietoEnator. In the light of the changing market situation for your line of business: Is there a change in the growth strategy of TietoEnator concerning the future? If this is the case – in what way/ways has it changed? 3. What time period is used for amortisation? How have discussions dealing with the concept of goodwill been conducted? Which regulatory work do you refer to concerning your handling of 4.

Appendix vi .

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